NEW YORK -- The dollar sold off broadly overnight Tuesday, reversing gains from the two previous global sessions to hit new 12-month lows against the euro and Swiss franc.
Investors turned to higher-yielding currencies as most Asian shares and European stocks moved higher, triggering a new wave of risk-taking. In early New York trading, high-yielding currencies have backed off their overnight highs and trading is somewhat volatile.
The dollar bloc currencies were the top performers in the overnight session, led by the New Zealand dollar, which set a new high for the year after posting its lowest annual current account deficit in more than four years, said Brown Brothers Harriman analysts.
The euro hit $1.4822 -- a fresh 12-month high -- and the dollar hit 1.0216 Swiss francs -- a new 12-week low -- as traders abandoned the positions they had staked out Monday in anticipation of this week's meetings of the G20 and the Federal Open Market Committee.
Also contributing to risk appetite and the broad dollar sell-off was an encouraging sign of a strengthening global economy, analysts said, with the Asian Development Bank overnight declaring some Asian economies -- including China and South Korea -- are growing faster than previously forecast.
The ADB revised its gross domestic product growth forecast for developing Asia for this year to 3.9% from 3.4% when it issued the ADO 2009 in March. It also revised its GDP growth forecast for next year to 6.4% from 6.0%.
When economic conditions brighten, yield-seeking investors who employ a risk-based trading strategy ditch the safe-haven dollar for higher-yielding currencies, such as the euro. But even the safe-haven Swiss franc strengthened overnight to its highest level in 12 months, showing just how broad the dollar sell-off had become.
"It was no real Swiss strength. It was more a function of dollar weakness," said Jacob Oubina, currency strategist at Forex.com in New Jersey. "Lots of dollar weakness is on the back of the same old risk trade."
Against a backdrop of dollar weakness, the U.K. pound strengthened. The pound had been under pressure over concerns about its banking system and policy official comments that it might lower key interest rates even further.
Early in New York the euro was at $1.4797 from $1.4676 late Monday, according to EBS. The dollar was at ¥91.27 from ¥92.05. The euro was at ¥135.04 from ¥135.09. The U.K. pound was at $1.6316 from $1.6206, while the dollar was at 1.0237 Swiss francs from 1.0327 Swiss francs.
The FOMC begins its two-day meeting Tuesday, and is expected Wednesday to announce whether it will increase ultra-low U.S. interest rates. It is not expected to increase rates.
These interest rates have weighed on the dollar in recent months, especially as world equity markets have rallied and higher-yielding currencies have ridden the wave of rising stocks, taking the wind out of the safe-haven dollar's sails.
Even though U.S. stocks briefly paused their rally Monday, if they follow the lead of most Asian and European bourses and open higher, the dollar is likely to continue getting battered, analysts said.
The underlying tone on the dollar is negative due to the expectation that the U.S. Federal Reserve will keep rates at current ultra-low levels, analysts said.
The uncertainty ahead of big policy events later this week could put a cap on any short-term dollar losses.
Investors are watching for this week's meeting of the Group of 20 nations. Currencies are not expected to be discussed at the meeting, but investors will be listening for clues as to when countries will begin to tighten monetary policy, as well as for any discussion of the dollar.
The Canadian dollar is higher Tuesday morning as it benefits from broadly based U.S. dollar weakness, but is down from its earlier highs after weaker-than-expected Canadian retail sales data for July.
The U.S. dollar was trading at C$1.0700 Tuesday morning from C$1.0784 late Monday.
After reaching a low at 1.0663 in overnight trading the U.S. dollar recovered some lost ground when Statistics Canada reported that retail sales in Canada slumped by 0.6% in July, a much weaker performance than the expected 0.7% gain.
Most of the decline was due to lower gasoline prices, Statistics Canada said, with sales at filling stations declining 3.4% from June. Overall retail sales volume edged down 0.1%.
Pervasive weakness in the U.S. dollar and strength in commodities suggest the Canadian dollar will overcome the temporary softening induced by the weaker data and resume strengthening.
—Ditas Lopez and Chester Yung in Manilla, David Roman in Singapore and Don Curren in Toronto contributed to this article.
