The dollar fell across the board on Tuesday while world stocks rose after Australia became the first developed economy to raise interest rates in more than a year and data showed the U.S. services sector expanded for the first time since 2008.
The dollar trimmed losses after Saudi Arabia, Russia, Japan and other policymakers denied a report that Gulf Arab states were in secret talks with Russia, China, Japan and France to replace the U.S. dollar with a basket of currencies in the trading of oil.
The Australian dollar hit a 14-month high against the U.S. currency after the country's central bank raised interest rates by a quarter point to 3.25 percent and heralded more to come, saying it was safe to row back on stimulus now that the worst danger for the economy had passed.
Combined with an upbeat U.S. services sector report on Monday, investors are expecting that gradual, not sudden, unwinding of emergency monetary policy would give a vote of confidence that the global economic recovery is on track.
The big story is Australia as other countries will now seek to raise rates, in contrast to the United States where the Fed is expected to raise rates last, said Lee Hardman, currency analyst at Bank of Tokyo-Mitsubishi UFJ.
In the short term, the dollar would remain under pressure as risk sentiment was still improving and capital flows were turning toward higher growth and emerging assets, he said.
The dollar fell 0.4 percent against a basket of major currencies <.DXY>, and it was down 0.3 percent at 89.27 yen. The Australian dollar rose as high as $0.8876.
KOREA NEXT? Australia's move is expected to be followed by Korea, whose won currency also hit a one-year high against the U.S. currency before retreating on suspected intervention by the authorities.
The U.S. dollar fell earlier in Asia after Britain's Independent newspaper cited unidentified sources in Gulf Arab states and Chinese banking sources in Hong Kong in a report on a possible move to replace the dollar in oil trading.
The MSCI world equity index <.MIWD00000PUS> rose 0.7 percent while the FTSEurofirst 300 index <.FTEU3> also rose around 0.7 percent. Emerging stocks <.MSCIEF> gained 1.2 percent.
U.S. crude oil rose more than 1 percent to $71.13 a barrel, helped by a weaker dollar.
The December bund future fell 18 ticks.
The first rate hike in Australia may be a wake-up call that current exceptional loose monetary policy shouldn't be taken for granted, KBC said in a note to clients.
However, the immediate impact should be rather limited, as the growth performance between Australia and the U.S. and Europe has been totally different over the past year.
In the UK, industrial output in August fell unexpectedly and at its sharpest monthly pace since January as factories shut down for the summer break and oil and gas plants closed for annual maintenance, official data showed on Tuesday.
(Additional reporting by Tamawa Desai; Editing by Sue Thomas)