The dollar climbed back towards a two-month high versus a basket of currencies on Monday as weak economic data in Australia and New Zealand showed more signs of a global slowdown, giving the battered US currency a boost.
A survey showed business confidence in Australia hitting the lowest since September 2001 and housing finance falling sharply, while a report in New Zealand showed housing price gains slowing for an eighth straight month and were projected to fall.
After the dollar tumbled from the Federal Reserve's aggressive interest rate cuts and efforts to pump cash into locked-up money markets, the Fed is now seen on hold and expectations are mounting for other central banks to cut rates.
In the case of New Zealand, the country's central bank is now seen slashing rates by up to 125 basis points over the next year and thereby eroding the allure of the New Zealand dollar's 8.25 per cent rate – the highest among industrialised economies.
But while analysts said there were many reasons for a fall in the kiwi, the case for a slide in the Australian dollar was not so clear cut as the country's labour market is robust and steep commodity prices provide an economic boon.
"It may be the beginning of the downtrend for the Aussie, but I'm not convinced the Aussie will collapse from here," said Masafumi Yamamoto, head of FX strategy for Japan at Royal Bank of Scotland.
The New Zealand dollar slid to a four-month low against the US dollar after Monday's data, but the Aussie remains not far away from a 24-year peak struck against the greenback last month.
The dollar rose to 103.44 yen gaining 0.6 per cent from late US trade.
Traders said dollar buying from some players like Japanese importers, which are grappling with the steep rise in commodity prices, helped lift the US currency in early trade.
The yen gave up initial gains and slipped as Japanese stock markets were resilient to oil prices holding at record peaks near $126 (Dh463.68) a barrel. The Nikkei average gained 0.7 per cent.
Market players use the performance of stocks as a thermometer of risk appetite and whether to hold carry trades – borrowing the low-yielding yen to buy higher-yielding currencies.
The euro slipped 0.5 per cent to $1.5406 but the single currency was up slightly at 159.36 yen.
The Australian dollar shed 0.6 per cent to $0.9365 while the New Zealand dollar dropped 0.7 per cent to $0.7635.
But helping prop up both currencies was steady buying by Japanese retail investors and traders frustrated by the persistently low yields available at home.
Data from the Tokyo Financial Exchange showed Japanese margin traders – who make leveraged bets on currencies with borrowed funds – snapped up a record one-day amount of New Zealand dollars last Thursday.
G7 and euro slowdown
Some market players said the dollar was helped by a report from last week in the Wall Street Journal saying US officials were behind the push among Group of Seven powers to toughen language on currency volatility aimed at the US currency's tumble.
The report followed a similar one in the Financial Times last week saying investors were focusing too much on the short-term problems in the United States than the medium-term growth outlook in Europe.
Mounting signs that European growth is stumbling has stirred speculation the European Central Bank could tiptoe towards trimming rates.
A string of poor economic data in the euro zone, along with the outlook for the Fed to keep rates steady, drove the dollar's rebound to two-month highs against the euro and a basket of major currencies last week.
"It will take time for markets to make conclusions about the relative monetary policy outlooks," said Tomoko Fujii, head of Japan economics and strategy at Bank of America. "It is not easy to draw conclusions about whether the Fed is really done or not."