Recovery in risk appetite weighs on dollar

By Steven C. Johnson

NEW YORK (Reuters) - The dollar weakened broadly on Monday, hitting a six-week low against the euro, as strong U.S. corporate earnings prompted investors to plunge back into high-yielding currencies and other risky assets.

Reports of a last-minute rescue for ailing U.S. lender CIT Group boosted optimism, helping push the euro to $1.4249, its highest level since early June.

An index of the dollar against six major currencies hit a six-week low .DXY, while the yen fell and the Australian and New Zealand dollars soared. Both rose last week when Goldman Sachs (GS.N) and Intel (INTC.O) reported strong second-quarter earnings, fanning hopes that an economic recovery is underway.

"It's a risk-preference story. With equities firmer and breaking some semi-interesting levels, the dollar has come under pressure as a result," said John McCarthy, director of foreign exchange at ING Capital Markets in New York.

Volume was lighter than usual, however, with Tokyo shuttered for a local holiday.

The euro rose 1 percent to $1.4230. A climb above $1.4337 touched in early June would take the pair to its highest level of the year.

The euro also added 1 percent to 134.08 yen while the dollar was flat at 94.24 yen.

Sterling rose 1.3 percent to $1.6542, near a three-week high, while the New Zealand dollar neared its 2009 high of $0.6595, rising almost 2 percent to $0.6578. Australia's dollar neared a five-week high at $0.8159, up 1.5 percent.

SEEING IS BELIEVING

Some analysts said the euro looked overextended, especially after it failed to add to its gains following an upbeat report on U.S. leading indicators.

The euro and high-yielders like the Australian dollar "are having a really impressive run, which leaves them vulnerable to profit-taking if upcoming data or earnings undershoot the market's elevated expectations," said Omer Esiner, market analyst at Travelex Global Business Payments in Washington.

HSBC in a research note pointed out that stock market gains also look set to fade and say some of the current rally may be a "squeeze" of investors who expected a summer slump to follow last spring's rally.

"We're not sure that a lot more people now 'believe' the stock market will continue to rally from here," said HSBC.

But for now, investors are content to run with the pack, said Jay Meisler, principal of Global-view.com, an online forum for traders and investors.

"I get the sense there is some skepticism over this latest bout of risk appetite but it is hard to stand in the way," he said, "especially when forecasts, such as the one from Goldman Sachs today, get raised."