UDN Invesco DB US Dollar Index Bearish Fund

By Deborah Levine

The dollar fell versus the euro Thursday as Europe's single currency got relief from China's denial of news reports that it was considering the sale of some of its holdings in euro-denominated bonds.

The euro (CUR_EURUSD) rose to $1.2356, up from $1.2197 in late North American trade Wednesday. Its passage of $1.23 tripped some orders to buy back the euro, according to Action Economics.

The shared currency touched a four-year low near $1.2144 on May 19.

The dollar index (DXY), which tracks the U.S. unit against a basket of six major currencies, fell to 86.305 from 87.159 on Wednesday.

Markets shifted as investors became more willing to own asset classes considered riskier and found less need for the relative safe-haven status of the U.S. currency, which had notched big gains this month amid worries about debt and the fiscal cutbacks needed in Europe.

U.S. equity markets rallied Thursday, with the S&P 500 Index (SPX) gaining 2.6%. That followed advances in the European and Asian markets.

"The drubbing stocks and commodities have sustained since April 23 was enough for the time being, or at least until there's greater clarity as to what the real cost of the euro-zone fiscal and debt makeover will be," said John Stoltzfus, a senior market strategist at Ticonderoga Securities.

The euro had slipped below $1.22 late Wednesday after the Financial Times reported that China was reviewing its holdings of European bonds. But on Thursday the China State Administration of Foreign Exchange, or SAFE, called that report "groundless."

In a statement posted on its website, the agency said it supports measures the European Union and the International Monetary Fund have undertaken to ensure financial stability within the euro zone, which it described as "one of the most important investment markets."

Among the takeaways for investors is that unofficial reports about Chinese policy efforts should be taken with a grain of salt.

"China does not leak," said Marc Chandler, a currency strategist at Brown Brothers Harriman. And this, he added, "does not mean that they do not monitor developments that impact their investment."

The swing late Wednesday and in the Asian and European session also indicate it's more a "panic" of short-term traders, not medium- and long-term investors who "typically react gradually to developments," Chandler wrote in a note.

Against the Japanese yen, the dollar traded at (CUR_USDYEN)  ¥90.85, up from  ¥90.01.

The euro traded at  ¥112.24, up from  ¥109.74 (CUR_EURYEN). The yen and the dollar tend to rise when investors want a safer, albeit lower-yielding, currency and to fall when risk appetite is on the rise.

The euro set a low of $1.2155 in Asian trade, failing to test a four-year low and setting the stage for a rebound, analysts said. But they also warned that upside was limited.

The dollar crept a little higher after the Labor Department said the number of Americans filing first-time claims for unemployment benefits fell 14,000 to 460,000 in the latest week.

That was tempered by a separately report saying the economy grew at a revised 3% pace in the first quarter, slower than initially reported.

"The market is likely to need clear evidence that the U.S real economy has been able to weather the euro-inspired storm," said Alan Ruskin, head of currency strategy at RBS.

Monthly results

For May -- with the last trading day of the month Friday, heading into the Memorial Day holiday -- the dollar index is on pace for the biggest gain since October 2008.

It's up from 81.866 on April 30, extending its advance to a sixth straight month, as debt-related problems in peripheral members of the euro zone, protests of cost-cutting efforts and other actions taken by officials are expected to weigh heavily on growth in the region.

The euro is on track for its biggest monthly drop since January 2009.

"In order for the currency pair to sustain its gains and to turnaround permanently, we need to see action by policy makers," said Kathy Lien, director of currency research at GFT.

Still, some of the options that would help the euro recover in the near term -- including possibly lower interest rates or coordinated injections of liquidity -- are all bearish for the euro longer term, she said.

In May, the dollar has slipped from  ¥94.01, likely constituting the biggest one-month slide since November.

Among the more popular exchange-traded funds, PowerShares DB U.S. Dollar Bearish Fund (UDN) lost 6.8% in May, while PowerShares DB U.S. Dollar Bullish Fund (UUP) returned 6.3%. CurrencyShares Euro Trust (FXE) has fallen 8.4% this month. CurrencyShares Japanese Yen Trust (FXY) is up 4.4% so far in May.