NEW YORK – The dollar rebounded on Wednesday as investors focused on relative interest rates, which increasingly were expected to favor the dollar, and reversed some bets against the currency.
Early in the session, the U.S. currency soared more than 2 percent against the Australian dollar after the Reserve Bank of Australia (search) opted to keep interest rates unchanged. It rose more than 1 percent against the Canadian dollar, adding to sharp gains on Tuesday after the Bank of Canada (search) also opted to keep rates flat.
As the dollar's gains spread to other currencies, traders scrambled to cover short positions after weeks of steep dollar declines. Short positions essentially are bets that a currency will fall.
"All position-squaring, nothing fundamental. Everyone was worried about a correction and here it is," said Jason Daw, senior G10 foreign exchange strategist with Merrill Lynch in New York.
The rapid decline of the dollar in the past few months had traders anticipating a broad rebound. But how far the move goes to retrace the currency's losses may depend on how thin trading conditions become as the year closes.
"I wouldn't be surprised if this correction went another day," said Daw. He added that some investors who profited off the dollar's descent may want to hold on to their winnings instead of trying to play the currency's move higher.
Other analysts emphasized that Wednesday's rally, whether or not it lasts until Thursday, does not change any long-term views on the dollar.
"We tend to think this is a short-term phenomenon ... This is a corrective rally within a dollar bear phase," said John Rothfield, currency strategist with Bank of America in San Francisco.
The dollar leaped against the euro to its best single-day rise in two months. By late afternoon the euro was at $1.3335, down about 0.70 percent from late Tuesday.
Against the yen, the dollar jumped more than 1 percent from the prior late New York session, to 104.05 yen .
The dollar also rose against the Swiss franc, to 1.1492 francs .
Dealers said the rate decisions were largely expected but served to remind the market that while interest rates are rising in the United States, they are likely to remain flat in other countries, where growth has been constrained, at least in part because of strong currencies.
New Zealand's central bank was the latest to leave the country's interest rates unchanged. But the bank said it could not rule out tightening if stronger-than-expected inflation pressures emerged.
As U.S. interest rates rise while those of other countries hold steady or fall, it becomes less expensive, or more rewarding, for investors to hold dollar-denominated assets, such as Treasuries. An auction of $5 billion in 5-year Treasury notes on Wednesday attracted strong demand from foreign investors.
"Canada really got the ball rolling and (the Canadian dollar) continues to get hammered against the dollar," said John Beerling, chief dealer at Wells Fargo in Minneapolis.
The central banks of Britain and Sweden meet this week, but, like authorities in Canada, Australia and New Zealand, they are expected to keep rates steady.
In contrast, the Federal Reserve (search) is widely expected to raise rates by a quarter percentage point, to 2.25 percent, next Tuesday.
The ferocity of Wednesday's dollar rally had some dealers wondering if the European Central Bank, which has expressed its concern over the strong euro, may have been intervening to push up the dollar.
But others said there was no sign of ECB action.
"There are definitely no central banks in," said a Frankfurt-based trader. "They are not doing anything in the open, and nothing covertly either."
The ECB declined to comment on the intervention talk.
On Wednesday, Irish Finance Minister Brian Cowen told Reuters Europe had received no indication of a U.S. plan to tackle dollar weakness. He also said there was no plan for European-Japanese action to affect exchange rates.