Dollar drifts, investors nervous on US outlook

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The dollar was little changed on Wednesday as investors remained nervous about the health of the US economy and financial system, while a rebound in gold and commodity prices spurred some light selling of the greenback.

Renewed calm in financial markets also prompted market players to sell the dollar and buy gold and oil in what has been a popular trade betting that the global economy will withstand the troubles in the United States.

The euro had surged more than 1 percent against the dollar on Tuesday after US data showing consumer confidence hitting a five-year low and consumer expectations sinking to the lowest since 1973, while house prices fell further across much of the country.

Analysts said the latest news highlighted the fact that the US economy is probably in a recession.

"In the near term we could see the dollar trading on the back foot as investors choose to put their money into assets that give them a higher return or yield," said Sharada Selvanathan, a currency strategist at BNP Paribas in Hong Kong.

But Selvanathan said the dollar may stage a rebound in the medium term.

The dollar has gradually pulled up from record lows against the euro and a 13-year low versus the yen in the past week as investors have hoped the worst of the financial crisis stemming from the US subprime mortgage market may be over after the collapse of investment bank Bear Stearns.

The euro dipped to $1.5630 from near $1.5650 in late US trade after hitting the day's high of $1.5668 on the rise in commodities.

On Tuesday the euro posted its second-biggest one-day rise for two years and climbed back towards the record peak of $1.5905 set last week.

Gold edged up to $940 and has risen around 4 percent from a one-month low struck last Thursday.

The dollar was down slightly at 99.95 yen from near 100.00 yen, while the euro retreated to 156.20 yen from 156.48 yen.

The Federal Reserve's array of efforts to ease the strains in financial markets and limit the damage to the economy have also helped improve investor confidence.

The Fed has chopped short-term rates to 2.25 percent from 5.25 percent six months ago, even as the European Central Bank has kept rates steady at 4 percent.

"Central banks appear to have done enough in the short term to stabilise market sentiment and provided much-needed breathing space for risk appetite," said currency strategists at UBS in a note to clients.

Investors are now awaiting Germany's Ifo survey, which is forecast in a Reuters poll to fall to 103.4 from 104.1. The confidence figure is seen as a key barometer of how the biggest economy in the euro zone is faring.

A decline in Asian stock markets made some traders cautious about using the low-yielding yen as a cheap source of funds to buy higher-yielding currencies in carry trade.

The New Zealand dollar, a bellwether of the carry trade, dipped about 0.7 percent against the yen to 80.17 yen. Japan's benchmark Nikkei share average was down 1 percent in afternoon trade.