* The dollar rose on Tuesday as risk sentiment declined. US housing starts increased less than forecast and producer prices unexpectedly fell, increasing worries about the economic recovery and deflationary fears. US stocks consolidated gains and the S&P 500 index fell 6.85 to 1,091.06. The yen declined modestly. The euro reversed earlier gains after touching the 1.50-handle resistance. Sterling was pressured by the UK’s record budget deficit. The overbought Australian dollar fell despite hawkish comments by the Reserve Bank of Australia.
* The USD/CAD surged after the Bank of Canada warned about the strong Canadian dollar. The BOC is worrying that inflation will fall below its inflation target and Canada’s economic recovery may falter. The BOC said: “Heightened volatility and persistent strength in the Canadian dollar are working to slow growth and subdue inflation pressures. The current strength in the dollar is expected, over time, to more than fully offset the favourable developments since July.” The USD/CAD is likely to trade between strong support in the 1.02 area and strong resistance in the 1.06. If the downtrend is broken, a strong rally may occur.
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