The dollar held steady against the euro and yen on Tuesday as strong demand for the U.S. currency to settle financial needs outweighed signs of receding risk worries such as rising share prices and falling interbank lending rates.

The dollar got a boost from Federal Reserve Chairman Ben Bernanke’s testimony before Congress on Monday endorsing more government spending to stimulate the U.S. economy, even if such a move could worsen the already huge U.S. budget deficit and weigh on the dollar long-term.

A bleak outlook on the global economy and expectations for more monetary easing worldwide could also support the dollar as other major central banks such as the European Central Bank have more scope for aggressive rate cuts compared to the Fed, whose policy rate is already low at 1.5 percent, traders said.

Tight credit conditions and slumping stock markets had helped bolster demand for the dollar as a save-haven currency, along with the yen.

“The dollar’s strength against major currencies despite the rise in stocks and worries of another stimulus aggravating the budget deficit shows demand remains strong to use the dollar to settle finance needs,” said Hiroshi Yoshida, a currency trader at Shinkin Central Bank.

“It shows investors are still selling assets for cash, and that the general repatriation flows are driving the market and supporting the dollar,” Yoshida said. He said such flows might also be partially linked to Tuesday’s payout on Lehman Brothers credit default swaps. The payout largely has to be settled in dollars, boosting technical demand for the U.S. currency, traders said.

The dollar eased 0.1 percent against the yen to 101.76 yen , slipping from an earlier high of 102.16 yen, with traders expecting the pair to stay in a 101.50-102.50 yen band on Tuesday.

The euro eased 0.1 percent to $1.3329, slipping from an earlier high of $1.3358, and was likely to be weighed down by deteriorating economic conditions in the euro zone and concerns about European banks’ health, traders said.

Some traders were wary of a deeper drop in the euro, as the market seemed ready to test lows of $1.3258 and 132.15 yen.

Deteriorating views for other major economies lifted the dollar index, which measures the U.S. currency’s value against a basket of six currencies, rose to a 16-month high of 83.23 on Monday. The index was up 0.1 percent at 83.051 on Tuesday.

As financial markets regain some stability, investors’ focus is shifting from fears of the worst of the credit crisis to economic fundamentals and monetary policy, traders said.

Bernanke said the economy was expected to be weak for several quarters and there was some risk of a protracted slowdown.

Fed policymakers meet next Tuesday and Wednesday, and economists and investors widely expect another rate cut.

The yen climbed against the euro and the Australian dollar as traders cited profit-taking pulling the pairs lower. The euro fell 0.4 percent to 135.50 yen, after rising as high as 138.57 yen on Monday.

The Aussie extended losses, falling 1.1 percent against the yen on expectations for more rate cuts by the Reserve Bank of Australia, as well as profit-taking, traders said.

RBA minutes from its meeting earlier this month indicated there was more room for rate cuts, though not as aggressive as this month’s 100-basis-point slash.

“The correlation between stock gains and the strength in emerging or resource currencies is less clear-cut, suggesting the market sees the current improvement in sentiment as just a temporary correction to excessive risk aversion during the panic phase of credit crisis,” said a senior dealer at a Japanese trading firm.

The yen will likely stay firm as expected global rate cuts shrink yield advantages and prevent high-yield pairs from rebounding, keeping carry trades out of favour, he said.

The Nikkei average rose 3 percent during the morning. But early afternoon it had eased to a rise of 1.9 percent.

Source: http://www.afxnews.com

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