Dollar rebounds amid risk aversion

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NEW YORK (CNNMoney.com) -- The U.S. dollar moved higher against major currencies Wednesday as grim economic reports stifled demand for risky currencies like the euro and the pound.

The euro traded down at $1.2836 from $1.3066 late Tuesday in New York. Britain's pound fell to $1.5241 from $1.5491.

Against the Japanese yen, the dollar traded at ¥95.37, down from ¥95.47.

The dollar had retreated Tuesday as investors cheered the government's latest efforts to stabilize the economy, which sparked a rally on Wall Street. But that sentiment faded Wednesday as the market was walloped by a barrage of bleak readings on the economy.

"As long as the correlation between currencies and equities remains tight the dollar will be vulnerable to moves such as the one we've seen over the past few sessions," said Steve Malyon, currency strategist at Scotia Capital in Toronto.

Wednesday's data highlighted weakness in housing, manufacturing, consumer spending and the labor market. The grim picture bolstered the market's conviction that the U.S. economy has entered a recession.

"With the US economy already slumping badly and the deleveraging process not yet concluded, we think that equities will struggle to maintain a lasting foothold," Malyon said.

On Wall Street, stocks opened lower but turned higher at midday as investors welcomed news that President-elect Barack Obama is forming an economic advisory board.

Major indexes in Europe were down, with the CAC-40 in Paris shedding 1.4% and London's FTSE falling 0.4%.

Asian markets were mixed. Japan's Nikkei tumbled 1.3% while Hong Kong's Hang Seng rallied 3.8% after China's central bank cut interest rates by 1.08 percentage point.

The dollar often rises against the euro and the pound when global stock prices are volatile as investors shun higher yielding assets in favor of the relative safety offered by the low-yielding greenback.