Finally some good news for US dollar. After hitting 25-month low on Monday the dollar rebounded on Tuesday and registered an increase against major currencies. However the currency still remains weak as investors expect interest rates to remain low. The dollar index which measures dollar’s performance against six major currencies increased by 0.2% to 75.18 midway through the trading day. On Monday the index had fallen to a low of 74.93 which was also its weakest level since August 2008.

Tuesday’s gain in dollar was expected as investors felt that the Monday’s fall in the currency was too much and too fast without any fundamental reason. Analysts also are of the opinion that the investors don’t have any reason to sell dollar any further after its recent falls.

Dollar gained maximum against Sterling on Tuesday. Sterling lost ground on Tuesday after Fitch commented that among the European economies UK was at maximum risk of losing its AAA rating. The agency also declared that the country required the largest budget adjustment. After reaching three month high on Monday, the pound declined to the $1.66 level and was knocked down to 90.00 pence per euro. It was approximately 0.4% down against the dollar at $1.6684.

The euro also declined by 0.3% to $1.4948 from the $1.4999 level on late Monday. The euro market was keenly looking forward to the investment sentiment reports for November. The ZEW survey for the Euro Zone which was expected to increase this month to 58.0 instead declined by 5.1 points to 51.8 providing a big blow to investor confidence. This drop also suggests that the rising unemployment and the foreseeable end to stimulus is denting investor confidence.

The dollar also gained against the Australian dollar which has proved to be a strong currency. Thanks to the strong Australian business confidence data, the currency had increased to above the $0.93 level falling a little short of its 15 month high. Against the yen dollar registered a marginal decline of 0.1% to 89.77 Japanese yen from 89.99 yen. Among other currencies the US dollar gained against Swiss francs but fell against Canadian dollar.

With dollar rebounding, stock markets saw a mixed day. The Dow increased by 20 points, while other indices like the S&P and Nasdaq Composite fell marginally by 1 and 3 point respectively.( For detailed analysis of how the stock market behaved please refer to our stock market daily brief)

With the expectation that the US interest rate will stay near zero, investors are currently using dollar to fund carry trades in higher yielding assets. That is traders are borrowing cheap dollar to funds riskier assets such as emerging markets currencies, oil or equities. In its recent note IMF has commented that given the current economic scenario the dollar will continue to be the funding currency for carry trade and this will contribute to pulling dollar further down. Analyst say that this phenomenon will continue until fed raises interest rate from their current near zero level.