March 25, 2008 / 5:07 AM / 12 years ago

Dollar snaps winning streak as credit jitters linger

TOKYO (Reuters) - The dollar fell against the euro and the yen on Tuesday as some investors looked for the U.S. currency to resume its slide on lingering worries about the ongoing damage caused by the credit crisis.

An employee counts dollar bills inside a money changer in Manila March 18, 2008. REUTERS/Cheryl Ravelo

The U.S. unit fell back towards the psychologically key 100 yen mark and lost nearly 1 percent on the day versus the euro, giving up earlier gains made after better-than-expected U.S. housing data had stirred some hopes about the U.S. economy.

The dollar had also rallied broadly on Monday on news that JPMorgan (JPM.N) had raised its offer for Bear Stearns BSC.N by fivefold, which boosted investor appetite for risk and lifted Wall Street stocks.

Market players had bought back the dollar to close short positions before the Easter holidays, but they resumed selling on doubts the U.S. currency will sustain a recovery despite the Federal Reserve’s aggressive efforts last week to boost liquidity in the financial system.

“The big question now is whether the dollar’s recovery was only a position adjustment before the holidays and there is something more that could rattle global markets,” said Haruhisa Takagi, head of the forex trading group at Sumitomo Mitsui Bank.

Many European financial markets reopen on Tuesday after being closed on Friday and Monday for the Easter holidays.

“There may be some players looking to set new dollar shorts before market volumes pick up,” said a trader at a European bank in Tokyo.

The dollar had climbed for four straight days, partly as investors cashed in on winning positions before the holidays and before the first quarter wraps up. Such profit-taking also spurred a drop in gold and oil prices.

But by Tuesday those trends began to reverse, with gold bouncing back to rise slightly.

The euro jumped 0.8 percent to $1.5551 from late U.S. trade on Monday after falling as low as $1.5341 in the previous session. The single currency is down from a record high of $1.5905 hit last week.

The dollar slid 0.5 percent to 100.11 yen, erasing all of its earlier gains to above 101 yen made after data on Monday showed that sales of existing U.S. homes rose in February for the first time since July.

The dollar had tumbled to a record low against the euro and a 13-year low of 95.77 yen last week when the announcement of Bear Stearns’ takeover at a rock-bottom price stoked fears that other major financial firms could be casualties in the crisis.

The Australian dollar climbed about 0.6 percent against the dollar to $0.9119 and rose 0.1 percent against the yen to 91.31 yen on the improvement in risk appetite.

Rising stocks typically prod investors to borrow funds in low-yielding currencies like the yen to buy higher-yielding currencies in the carry trade. Japan's Nikkei share average .N225 jumped 2.1 percent on Tuesday.

But some market players were wary about returning to risky trades because several recoveries in risk appetite have proved to be short-lived since the credit market crisis erupted last August.

Investors will scour U.S. data later in the day that include the S&P/Case Shiller indexes on U.S. housing prices, along with the Conference Board’s report on consumer confidence in March.

Analysts said major currencies would remain choppy.

“This volatility will persist as the debate rages on as to the length and depth of the U.S. slowdown,” said currency strategists at RBC Capital Markets in a note to clients.

Additional reporting by Eric Burroughs and Chikako Mogi; Editing by Chris Gallagher

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