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Dollar, yen up as positions unwound; oil, Fed eyed

LONDON - The dollar hit a seven-week high against a basket of major currencies on Tuesday in part of a broader unwinding of positions across currencies and other assets which saw the yen rally and oil hit a three-month low.

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The Australian dollar was among the weakest performers after the Reserve Bank of Australia kept interest rates at 7.25 percent but sent a strong signal that it will ease policy soon to mitigate the effects of slowing demand.

The euro also fell below $1.55 for the first time in six weeks, hit by a bigger-than-expected fall in euro zone retail sales and succumbing to the dollar's broad rise on softer oil prices before an interest rate decision by the Federal Reserve.

"This is essentially a deleveraging process," said Sebastien Galy, senior currency strategist at BNP Paribas.

"It's a global squeeze. You have to detect the turning points in the high yielders ... (which is) leading to deleveraging. You see it in oil too. Wherever you were making money you have to close positions and compensate ... pushing some good trades down as well."

At 1100 GMT the dollar index, which measures the U.S. currency's performance against a basket of six currencies, was up a third of a percent at 73.73. Earlier it hit 73.828, the highest since mid-June.

The euro was down 0.5 percent on the day at $1.5500, having traded as low as $1.5488, according to Reuters data.

The Australian dollar was down more than 1 percent at $0.9185, below the key technical support level of the 200-day moving average at $0.9200.

Fed next

Oil prices fell to a three-month trough of $118 per barrel, while metals and other commodity prices also continued to drop as concerns of slowing global demand sparked waves of profit-taking.

Weak oil and metals prices were another factor behind the decline in the Australian dollar, a currency which is often closely correlated with the price of commodities and raw materials which Australia exports.

After keeping key interest rates at 7.25 percent, the RBA opened the door for the first cut in seven years by saying tighter credit conditions and slowing demand should cool inflationary pressures.

Investors sold the Aussie against a host of currencies, particularly the low-yielding Japanese yen, which also benefited from buying against the euro and sterling.

The euro fell almost 1 percent against the yen to 167.10 yen, helping to drag the U.S. dollar down a third of a percent against the Japanese currency to 107.80 yen.

Another batch of soft economic data from the euro zone, this time in the shape of June retail sales, helped to keep the selling pressure on the euro. (See)

"All in all, the data flow continues to point to an ongoing and abrupt deterioration of the growth outlook across the euro area," said Lehman Brothers economists, predicting a technical recession in the second and third quarters of this year.

The RBA's rate decision began a week of major central bank rate decisions. The U.S. Fed announces its decision around 1815 GMT Tuesday before the European Central Bank and Bank of England on Thursday.

The Fed is widely expected to keep key rates at 2.0 percent, although the futures market is pricing in a near one-in-five chance of a quarter percentage point rise.

If Federal Open Market Committee voting members Charles Plosser and possibly Gary Stern join Richard Fisher in calling for a rate increase, the dollar could get an additional boost.

"We see at least one FOMC member likely to vote for a hike in light of the increasing inflationary pressures, though there is the potential for three dissenters to emerge," said RBC Capital Markets strategists.