Dollar recovers some ground after sell-off

One hundred Euro banknotes lay on top of various Swiss Franc notes in this picture illustration at a bank in Warsaw, July 18, 2011.

NEW YORK (Reuters) - The dollar rallied on Wednesday, cushioned against declines by a lack of further news on U.S. debt ceiling negotiations, though the uncertainty was expected to keep the rally short-lived.

The dollar earlier fell to a record low against the Swiss franc and a three-week trough versus the euro. It recovered as investors locked in profits on short positions in the greenback this week.

Analysts said the dollar's outlook remained downbeat. Most market participants believed the deficit reduction proposals being discussed in Congress fall short of the budget cuts necessary to avert a U.S. debt downgrade by ratings agencies.

The euro was also pressured after Standard & Poor's cut Greece's sovereign credit rating further into junk territory, lowering it to CC from CCC, saying the European Union's proposed debt restructuring would put the country into "selective default.

"The dollar sell-off has come pretty far, pretty fast," said Jonathan Lewis, founding principal of the New York-based Samson Capital Advisers, with assets under management of $7 billion. "It is possible that the dollar is getting some sort of safe-haven bid, even though that's a bit of an oxymoron for the dollar."

While market participants widely expect Congress to strike a debt agreement, a ratings downgrade seemed more than likely.

Analysts polled by Reuters expect the United States will probably lose its AAA credit rating from at least one major rating agency and believe the wrangling over the debt ceiling has already damaged the economy.

In late afternoon trade, the dollar was up 0.1 percent versus the Swiss franc at 0.80224 franc, after earlier hitting a record low of 0.7996 on the EBS trading platform.

The Swiss franc, a traditional safe-haven, has been the main beneficiary of the dollar sell-off, and traders said the dollar could fall as low as 0.7600 franc in the near term. Analysts said the Swiss National Bank was unlikely to enter the market to weaken its currency despite its elevated levels.

The dollar also benefited from weakness in the euro, which came off a three-week high on concerns a Greek bailout plan agreed last week may not be sufficient to prevent contagion from the debt crisis.

The euro was down 0.9 percent at $1.43715, having earlier climbed to $1.45370. Traders cited support in the $1.43500-600 region and offers at the $1.44200-240.

The euro's earlier fall followed comments by German Finance Minister Wolfgang Schaeuble that Berlin opposed giving the euro zone's rescue fund carte blanche to purchase bonds in the secondary market.

After Schaeuble's comments "the unanswered questions regarding the new bailout package for Greece could instill a bearish outlook for the single currency, and the relief rally in the euro appears to be giving out as European policy makers struggle to restore investor confidence," said David Song, currency analyst at DailyFX in New York.

The euro also fell against the Swiss franc, going as low as 1.1503 Swiss francs, not far from the lifetime low of 1.1365 touched earlier in July on EBS.

The drop in the euro helped push the dollar index .DXY off its lows. It was up 0.8 percent at 74.072, off an earlier trough of 73.421, its lowest since early May.

In early global trading the yen also gained as investors sought perceived safer alternatives to the dollar, stoking concerns the Japanese authorities may intervene to stem the yen's strength though the advance faded as the day progressed.

The dollar earlier fell to a four-month low of 77.570 yen, just short of a reported option barrier at 77.50. It was last up 0.2 percent at 78.021 yen. The record low in the pair was 76.250 hit in mid-March.

Japanese Finance Minister Yoshihiko Noda said on Tuesday Japan is closely watching "one-sided" moves. Analysts viewed intervention as unlikely given that dollar/yen falls have been orderly but said officials were likely to ramp up the rhetoric and fear of action may limit the yen's rise. Japan intervened to curb the yen in March.

The Australian dollar, rose 0.6 percent to US$1.1019, after earlier touching a high of US$1.1081. Helped by strong Australian inflation data. [ID:nL3E7IR0BQ] the peak was the highest since December 1983 when it was first allowed to float freely.,

The New Zealand dollar also touched its highest against the U.S. dollar since being allowed to float freely in March 1985 at $0.8766 early in the global day.

But the New Zealand dollar declined a few hours ahead of a Reserve Bank of New Zealand decision on the official cash rate, currently at 2.5 percent. It was last down 0.2 percent at $0.8696.

(Reporting by Nick Olivari and Gertrude Chavez-Dreyfuss; Editing by Leslie Adler)