Dollar rebounds from two-week low as risk sentiment worsens

NEW YORK (Reuters) - The dollar rallied from a two-week low on Tuesday as a sell-off in world stock markets spurred safe-haven bids and investors worried about slowing global growth.

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Other safe-haven currencies such as the yen and Swiss franc gained as well.

“Dovish comments from the Fed that the world economy may be cooling off has dented investors’ sentiment,” said Viash Sreemuntoo, corporate trader at online FX broker XE.

Earlier, cautious comments overnight by Federal Reserve officials about the global economic outlook knocked the dollar to two-week troughs as it suggested the Fed could slow the pace of raising interest rates or that the tightening cycle is ending.

In midmorning trading, the dollar index, a measure of its value against a basket of six major currencies, rose 0.3 percent to 96.510, off its weakest level since Nov. 7.

“With investors holding significant long U.S. dollar exposure, especially versus the yen, we think the dollar remains at risk of weakening further if the market’s doubts about the Fed outlook are sustained – or increase further – especially as the broader dollar lift associated with seasonal demand around this time of year is typically at or close to a peak by now,” said Shaun Osborne, chief FX strategist at Scotiabank in Toronto.

The euro also gave up its gains, spooked by a slide in European equities. Italian bank shares hit a two-year low and Italian bonds sold off again amid a continuing confrontation with the European Union over Rome’s budget plans.

Europe’s single currency was last down 0.4 percent at $1.1401, off a two-week high earlier.

Persisting worries about the China-U.S. trade conflict and Brexit negotiations also kept investors jittery.

With investor nerves high, the yen added 0.1 percent to 112.48.

U.S. 10-year Treasury yields pulled back, removing some support for the greenback.

The dollar was also weighed down by weak U.S. data.

“For the U.S. equity market to stabilise, either the rest of the world will have to show better growth or the Fed will have to moderate its stance,” Hans Redeker, global head of FX strategy, at Morgan Stanley, wrote in a client note.

“Both outcomes are U.S. dollar-negative and explain why rising U.S. equity volatility has failed to spill over into emerging markets.”

Sterling was slightly lower against the dollar, but was firmer against the euro as Prime Minister Theresa May heads to Brussels for more Brexit talks.

In the cryptocurrency market, bitcoin lost another 10 percent to below $4,500 as sentiment soured further.

Reporting by Gertrude Chavez-Dreyfuss; additional reporting by Tommy Wilkes in London; editing by Jonathan Oatis