The dollar steadied on Wednesday, but was off a seven-month high as a recovery in gold and oil prices as well as concerns about the U.S. financial system weighed on sentiment for the greenback.

Crude oil and gold pushed higher and showed signs of snapping their month-long sell-off. That underscored the dollar’s vulnerability, as the tumbles in oil and gold had reinforced its broad gains.

Investors unwinding bets that the global economy will withstand the U.S. downturn and credit crisis have helped support the dollar against the euro and other currencies.

But it failed to make further headway on concerns that U.S. home financial firms Fannie Mae <FNM.N> and Freddie Mac <FRE.N> may need a government bailout — worries that pushed U.S. stocks lower for a second straight session on Tuesday.

“The currency market is playing a tug-of-war between those who expect the dollar to resume its climb after a pause and those who are sceptical about whether the dollar is worthy of buying longer-term,” said a senior trader at a Japanese trading firm.

The dollar was struggling to extend its gains against the euro, which fell to a six-month low on Tuesday, as traders, having largely factored in a euro zone growth slowdown, look for more signs pointing to a possible interest rate cut from the European Central Bank.

A recent sell-off in high-yielding currencies such as the Australian dollar on a sharp reversal in the Australian growth outlook and growing expectations for a rate cut, shows risk aversion was likely to keep the yen relatively firm against the dollar, traders said.

“The dollar doesn’t have a reason on its own to extend gains sharply,” said a dealer at a Japanese trust bank.

“But the dollar is keeping a relatively firm tone overall because other currencies have been hurt by worries about economic deterioration in their own regions.”

The euro inched down 0.1 percent to $1.4764 <EUR=>, but off a six-month low of $1.4630 hit on Tuesday.

The euro has plunged nearly 9 percent from a record peak of $1.6040 hit in July, a move many traders saw as extreme and may point to a correction.

Having entered a downtrend after holding above $1.5 for six months, the single currency was likely to hover in a range around $1.46 until new signs emerge on the ECB’s policy course, the dealer at the trust bank said.

The dollar inched up 0.1 percent to 109.88 yen <JPY=>, well below a seven-month high of 110.67 yen hit last week.

A dollar index that measures the dollar’s performance against a basket of six major currencies was up 0.1 percent at 76.842 <.DXY>, slipping from a new high for the year at 77.413 hit on Tuesday.

Oil prices <CLc1> rose about 1.5 percent on Tuesday as part of a broad commodities rebound triggered by weakness in the dollar. Gold rose 1.4 percent on Tuesday to close in New York above $810 an ounce [GOL/R].

The dollar initially got some support from inflation data, which suggested the Federal Reserve would need to raise interest rates to tame inflation by year-end, but the gains quickly evaporated on worries about slower economic growth.

Annual U.S. producer price inflation hit a 27-year high of 9.8 percent in June, while new U.S. home building projects fell 11 percent to their lowest annual rate in more than 17 years.

While the Fed is expected to keep interest rates on hold for coming months after having already slashed them, other central banks were seen having to lower interest rates to help bolster their economies.

The Bank of England will release minutes of its August monetary policy meeting later in the day, with market watchers looking for clues as to the timing of a potential rate cut.

Source: http://www.afxnews.com

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