World Forex

TORONTO (Dow Jones)--The euro dropped to the $1.40 level against the U.S. dollar late Tuesday morning before rebounding modestly as the greenback continued to strengthen on risk aversion and month- and quarter-end flows. The dollar also advanced against the pound and the Swiss franc.
After reaching a high at $1.4153 in earlier trading, the euro slipped to a session low at $1.4000, according to EBS, before recovering slightly.
While the euro and other more risk-sensitive currencies had advanced against the dollar in early North American trading, the overall direction in currency markets changed as some discouraging U.S. data helped reawaken worries about risk and the outlook for the global economy, and equity markets shifted well into negative territory.
"It's been a little bit of a surprise, just in terms of the euro and some of the other currencies reversing some of their overnight gains, but I think at the end of the day it still comes down to that overall risk aversion theme," said George Davis, chief technical analyst for foreign exchange at RBC Capital Markets.
A favorable attitude toward risks and gains in some overseas stock markets helped the euro and other risk-sensitive currencies in overnight and early trading, but that shifted later in the morning as stock indexes slumped decisively into negative territory, he said.
"I think the direction of equity markets is still the key factor in terms of determining which way the currency markets move," he said.
Accompanying and influencing the move lower in stocks and the resurgence in risk aversion were some discouraging U.S. data releases.
The Conference Board, a private research group, said its index of consumer confidence for June fell to 49.3 from a revised 54.8 in May, which was originally reported as 54.9.
The current month's reading was well below economists' expectations of 56.0, according to a Dow Jones Newswires survey.
The S&P/Case-Shiller Home Price Index for its 20-city composite fell 18.1% in the year ended in April. Economists had expected an 18.6% decline. The 10-city composite dropped 18.0% in April.
Month- and quarter-end flows accentuated the U.S. dollar gains on Tuesday, market watchers said.
"There definitely are some month and quarter-end flows going through the markets," said RBC's Davis.
Ahead of high-risk events Thursday, including U.S. monthly payrolls and the European Central Bank policy meeting, traders may now be squaring their long-euro positions, which were built on risk appetite, said Greg Salvaggio, vice president of capital markets at Tempus Consulting in Washington.
Investors may be "getting out of outperforming markets and going into underperforming just to rebalance portfolios at the end of the month," said Chris Turner, head of foreign exchange strategy at ING Financial Markets in London.
Turner added that euro-zone M3 data released earlier showed very soft lending and reminded the market that the ECB liquidity measure last week was necessary and puts traders on edge ahead of the ECB policy meeting Thursday.
In late morning trading Tuesday, the euro is at $1.4019 from $1.4077 late Monday and at Y135.15 from Y135.22.
The dollar is at Y96.34 from Y96.04 late Monday in New York, according to EBS. The dollar is at CHF1.0862 from CHF1.0830 and from a session high Tuesday of CHF1.0891.
The pound, which hit an eight-month high at $1.6742 in earlier trading, is at $1.6448 after hitting a daily low at $1.6424 and from $1.6559 late Monday.
The pound gained after favorable housing market data, but retreated after a disappointing revision to the first-quarter contraction in gross domestic product that estimated it at -2.4% instead of the initial -1.9%.
It then sank even further as the general market tide turned against more risk-sensitive currencies and in favor of the U.S. dollar.