By Frances McInnis Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The dollar rose against the euro Tuesday as optimism faded over the appreciation of the Chinese yuan and investors stayed cautious ahead of the Federal Reserve\'s assessment of the pace of the global recovery.
Fresh worries over the health of Europe\'s financial sector also depressed market sentiment. The uncertainty tended to benefit the dollar and yen over the euro as they function as safe-haven currencies.
The rate-setting Federal Open Market Committee announces its decision on key interest rates Wednesday; the FOMC is not expected to increase rates, but investors will scour the committee\'s statement for any clues as to when monetary policy might tighten.
\"The markets are just waiting and biding their time,\" ahead of Wednesday\'s meeting of the Fed\'s rate-setting committee, said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York. \"Investors are waiting to see what is said, then they\'ll react,\" which kept most currencies on Tuesday in a tight range.
Despite the cautious tone in markets, the U.K. pound mustered a rally against the dollar after Fitch Ratings weighed in favorably on the U.K. government\'s belt-tightening budget released Tuesday.
Late Tuesday, the euro was at $1.2277 from $1.2320 late Monday, according to EBS via CQG. The dollar was at Y90.39 from Y91.04, while the euro was at Y110.98 from Y112.15. The U.K. pound was at $1.4808 from 1.4754. The dollar was at CHF1.1068 from CHF1.1050.
The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 86.053 from 85.953.
The U.K. pound stacked up its gains against the dollar on the heels of the Fitch release, which called the U.K. budget a \"strong statement of intent,\" that could strengthen confidence in the U.K\'s AAA credit rating.
However, uncertainty about the direction of the yuan kept the overriding tone cautious. The People\'s Bank of China set the dollar-yuan central parity rate at 6.7980 earlier Tuesday, down from 6.8275 Monday, marking the largest single-day change in recent history. The yuan, however, actually weakened in subsequent trading, damping some market expectations for a steady march higher for the yuan.
\"The revaluation of the Chinese yuan appears to have come in with a bang and certainly its impact is limping out with a whimper,\" said Andrew Wilkinson, senior market analyst at Interactive Brokers in Greenwich, Conn.
By allowing the yuan to fall on Tuesday against the dollar, China\'s central bank appeared to be trying to temper expectations that the Chinese currency is bound to rise. The message to markets was that currency reform doesn\'t mean one-way bets on yuan appreciation are a sure thing. Traders said the day\'s moves added to uncertainty over the pace and extent of any yuan appreciation in the months ahead.
Worse-than-expected U.S. existing-home-sales data for May and sinking U.S. equities also tended to drive investors to the perceived safety of the dollar and yen.
Fresh worries over the euro-zone sovereign-debt crisis, and the possibility it will infect the region\'s banking system, also dragged down investor sentiment after Monday\'s downgrade by Fitch Ratings of French banking giant BNP Paribas.
The euro Tuesday dropped to fresh record lows against the Swiss franc, as investors continued to file into the Swiss currency based on solidly improving Swiss fundamentals and flee the euro over the sovereign-debt worries.
Late Tuesday, the euro was at CHF1.3592 from CHF1.3695 late Monday after dropping as low as CHF1.3586.
The Swiss currency\'s long-running rally has accelerated of late, after the Swiss National Bank last week stepped back from its policy of seeking to hold it down--a stance it reiterated Monday.
With the ICE Dollar Index strengthening, Deutsche Bank\'s PowerShares U.S. Dollar Index Bearish exchange-traded fund was down 0.20% from late Monday, while its PowerShares U.S. Dollar Index Bullish was up 0.12%. The two exchange-traded funds are based on Deutsche Bank currency futures indexes, whose composition mirrors that of the ICE\'s Dollar Index.