NEW YORK—The euro rebounded from its lowest levels since May, gaining modestly against the dollar after initially suffering on comments from the Reserve Bank of Australia that sovereign-debt woes could dent a global recovery.
The RBA increased its key interest rates, leading to a mild gain in the Australian dollar, but investors focused on the central bank's accompanying statement, which contrasted Australia's steady growth with continued pressures in other major economies.
"The RBA did note that the global economic recovery is still hesitant owing to the legacy of the financial crisis," said Sacha Tihanyi, currency strategist at Scotia Capital in Toronto.
The U.K. pound got some relief as new opinion polls showed that the risks of a hung Parliament in the U.K., fears of which sent sterling reeling on Monday, aren't so great after all.
Two new polls published Tuesday showed that the opposition Conservative Party is in the lead by 5 percentage points and by 7 percentage points, respectively. A poll Sunday had showed the lead dipping down to 2% and increased the prospect of the country being ruled by a Labour government for another five years. A general election needs to be called within the next few months.
The euro recently traded at $1.3584 from $1.3560. The dollar was at 89.12 yen from 89.09 yen, while the euro was at 120.72 yen from 120.80 yen. The U.K. pound was at $1.4969 from $1.4989. The dollar was at 1.0795 Swiss francs from 1.0794 francs.
The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 80.603 from 80.728.
The euro sank earlier to its lowest level since May 18, as investors sold off the common currency on the RBA's mention of sovereign-debt concerns, before recovering.
The euro could see some support over the next few days if debt-pressured Greece introduces new austerity measures to convince the euro zone--and markets--it can get its fiscal house in order, said Brown Brothers Harriman analysts.
Not under the pressures faced in the euro zone, the RBA rose rates for the fourth time since the height of the financial crisis on Tuesday, raising key rates by 0.25% to 4%.
RBA Gov. Glenn Stevens said that inflation in Australia in 2010 would likely match expectations. He also said that concerns over "some sovereigns remain elevated," and that fiscal problems in Europe and elsewhere threaten the global economy.
The U.S. dollar was down more than 0.5% in early trading against the Canadian dollar as investors positioned for a rosy assessment of the Canadian economy from the BOC after economic growth on Monday came in much stronger than expected.
The U.S. dollar was at C$1.0354 from C$1.0417 late Monday.
—Nicholas Hastings in London and Andrew Monahan in Tokyo contributed to this article.
