Dollar Rises; Investors Remain Wary of Risk

The dollar strengthened on Tuesday as a batch of grim U.S. economic data pushed nervous investors to seek safety in the greenback.

A late rally on Wall Street limited dollar gains against the euro and sterling and boosted it against the yen on hopes that financial market turmoil may be starting to ease.

But with the euro zone and Japan already falling into recession in the third quarter, investors remained skittish, and U.S. data showing a sharp slide in home prices in the third quarter and a record decline in producer prices last month added to their unease.

"More and more, the data that comes out points to a long, protracted recession, and none of that is going to do risk taking investors any good," said Chuck Butler, president of Everbank World Markets in St. Louis.

The dollar has rallied as the U.S. and global outlook has worsened, with investors pulling money out of commodities, stocks and high-yield currencies and parking it in safe-haven assets such as U.S. Treasuries.

According to Treasury data released Tuesday, foreigners bought $143.4 billion of U.S. securities in September, the largest net inflow since early 2006.

Testifying before Congress on Tuesday, Federal Reserve Chairman Ben Bernanke said massive demand for the dollar means it remains unrivaled as the world reserve currency.

In late afternoon, the dollar traded higher at almost 97 yen , boosted by U.S. stocks' late surge, but remained off its 97.40 session peak.

Aversion to risk usually benefits the yen as investors who borrowed it at low interest rates to finance investments elsewhere are forced to buy it back to cover their positions.

The euro was down at above $1.26 after dipping to $1.2568 earlier while sterling fell 0.3 percent to $1.4960 , off a $1.4902 session low.

"We are not ... out of the woods yet in terms of risk aversion. We're kind of still cautious about the environment, where discretionary risk taking in the currency market has been fairly limited," said Robert Blake, senior currency strategist at State Street in Boston.

Auto Anxiety

Fears about the future of U.S. automakers also darkened investors' mood as Treasury Secretary Henry Paulson reiterated his opposition to diverting $25 billion from a $700 billion financial bailout program to rescue Detroit.

More From CNBC.com ...

• Get After-the-Bell Dow 30 Quotes
• Credit Spreads and Libor Data
• Futures and Pre-Market Data
• Currency Data

Seeing General Motors , Ford Motor or Chrysler fail in the current environment "would not be a good thing," Paulson said during testimony before Congress, but added that the bailout package was meant for financial services firms.

The big three carmakers have warned of dire consequences for the auto industry if one or more is forced to file for bankruptcy.

If Congress were to approve an automaker bailout, Butler said that could push the dollar lower.

"The we've seen so much unwinding of risk trades is the dark outlook for the world economy, so if there's something that suggests there may be light at the end of the tunnel, the dollar tends to get sold off," he said.

A bailout for Detroit was far from certain, however. Congressional Democrats and President-elect Barack Obama have backed one but have encountered resistance from the Bush White House.

As long as investors are wary of risk, the dollar looks set to keep rising.

Strategists at Calyon said they expect the dollar to strengthen into the first quarter of 2009 and see "little prospect of a reversal earlier."

Copyright 2008 Reuters. Click for restrictions.