FOREX-Dollar falls as investors pare bets for higher rates

* Euro rises above $1.4050, dollar buying runs out of steam

* Investors reassess U.S. rate view, growth outlook

* Sterling firmer on data, lull in political storm

* 10 U.S. banks to pay back taxpayer funds (Adds comments, details. Changes byline)

By Vivianne Rodrigues

NEW YORK, June 9 (Reuters) - The dollar fell broadly on Tuesday, ending a two-day winning streak, as investors questioned whether the economy had improved enough to justify talk of higher U.S. interest rates by year end.

The euro rose above $1.4050 and sterling also rallied sharply while the U.S. Treasury said 10 of the country’s biggest banks could repay $68 billion in taxpayer money received during the height of the credit crisis, boosting hopes the worst is over. See, [ID:nN09364348]

Nonetheless, investors were growing less certain that the Federal Reserve would raise rates in 2009, a view that gained traction last week after data showing a slower pace of U.S. job losses in May boosted the dollar and two-year Treasury yields.

Joseph Trevisani, chief market strategist at FX Solutions in Saddle River in New Jersey, said investors who bought the dollar recently betting on higher borrowing costs were at a “risk.”

“Interest rates are not going to go up in this country anytime soon,” he said.

Overall, investors remained wary of making big bets in favor of the dollar, especially as they rethought the chances of a Fed rate hike this year. Two-year Treasury yields eased earlier to 1.3 percent on Tuesday after rising above 1.4 percent on Monday for the first time in seven months.

The U.S. dollar held its losses against most major currencies even after an auction of 3-year notes by the Treasury Department showed strong demand for the debt. See [ID:nTAR000708].

The euro rose earlier to a session peak of $1.4052 EUR=EBS before easing to $1.4010, up 0.8 percent on the day, while sterling added 1.3 percent to $1.6260 GBP=D4 after falling to around $1.58 Monday. The dollar fell 0.7 percent to 97.68 yen JPY=.

“There’s a very trivial chance that the United States will see significant inflation in the next 12 months,” said Michael Woolfolk, a senior currency strategist at The Bank of New York-Mellon. “I fully expect the dollar to trend weaker over the next several weeks unless big problems in Europe develop.”


Stronger-than-expected UK housing data and fading fears of a government collapse lifted sterling, with traders saying the market was relieved to see some members of Prime Minister Gordon Brown’s Labor Party offer him their support.

The euro wobbled overnight after a sharp slide in German industrial output suggested the biggest euro zone economy is still facing weak global demand for its goods.

But hope that Latvia, one of the most troubled economies in Eastern Europe, may yet avoid devaluing its currency helped the euro. The Swedish crown also soared against the dollar SEK= and euro EURSEK= after Latvia's finance minister said devaluation of the lat was "absolutely out of the question."

Sweden’s currency had fallen sharply because of Swedish bank exposure to Latvia’s economy, which may shrink by as much as 18 percent this year.

Earlier, dollar losses were checked when a government official said China, the largest holder of U.S. foreign reserves, had no intention of abandoning dollar assets, adding that no one talks about “dumping the dollar.”

The dollar could rebound, however, if the situation in Eastern Europe deteriorates or if other euro zone countries see their sovereign credit ratings cut as Ireland did on Monday, said Dan Cook, analyst at IG Markets in Chicago.

“The market is like a kid learning to ride a bike,” he said. “He feels confident as long as the parents hold his shoulders, but if they let go, it could be a different story.” (Additional reporting by Steven C. Johnson in New York; Editing by Leslie Adler)