Dollar declines for second day running as FX markets change course

The dollar fell for a second consecutive session on Tuesday, knocked off the 19-week peak reached at the end of January, while risk-sensitive currencies such as the Australian dollar and British pound gained.

After falling nearly 5% in January, world equities started February slightly firmer and currency markets have also changed course.

After hitting a 19-month high last week, the U.S. dollar index fell on Monday. On Tuesday, it was down 0.4% on the day at 96.281 at 1223 GMT.

Euro-dollar strengthened, up 0.3% on the day at $1.12705.

The dollar's downward turn could be due to end-of-month flows that left investors needing to sell dollars in the last week.

The improved risk appetite seen in stock markets may also be playing a role, as the dollar is seen as a safe-haven currency.

But there is view among investors and analysts too that, when it comes to the rate hike trajectory in major economies, the euro may be more attractive than previously thought, according to Neil Jones, head of FX sales at Mizuho.

The market is currently pricing in as many as five U.S. Federal Reserve rate hikes this year, with the first hike expected in March, according to Refinitiv data on Eikon.

Meanwhile, the European Central Bank maintains its ultra-loose monetary policy stance and has pushed back against any market expectations for ECB rate hikes this year.

Mizuho's Jones said some of the dollar's losses could come from the idea that the difference between the ECB and Fed may narrow.

"From the market perspective there is some thinking building that perhaps the ECB will raise rates and simultaneously that the Fed may not go as far as five hikes this year," he said, citing conversations with clients and observations from analysts.

German inflation data on Monday was well above expectations, with consumer prices rising 5.1% year-on-year in January, compared to 5.7% in December.

"If the euro zone inflation data also surprises on the upside tomorrow the market might bet on a more hawkish ECB. That means EUR might find further support in the run-up to the (ECB) meeting on Thursday," Commerzbank FX and EM analyst You-Na Park-Heger wrote in a note to clients.

Elsewhere, the dollar also fell against the Japanese yen, with the pair at 114.635, and it hit a six-day low against the Swiss franc.

The Australian dollar dropped sharply overnight after the Reserve Bank of Australia (RBA) pushed back against expectations for near-term rate hikes until inflation is higher.

But the "risk-on" tone in markets meant that it soon recovered and was up 0.5% on the day at $0.71045 in early European trading.

Britain's pound was up 0.3% at $1.3488.

In cryptocurrencies, bitcoin was up 0.6% at around $38,714, still far below November's all-time high of $69,000..

India's finance minister said the central bank will introduce a digital currency in the next financial year, using blockchain technology.

(Reporting by Elizabeth HowcroftEditing by Alexander Smith and Mark Potter)

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