Dollar mixed after early rally

Investors turned turned to the dollar after data showed U.S. consumer confidence fell to a record low.

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NEW YORK (CNNMoney.com) -- The dollar was mixed Tuesday after trading in a narrow range for much of the day.

The dollar rose earlier in the day as investors flocked to the safe-haven greenback after the dismal consumer confidence report was released Tuesday morning.

The index fell to 37.7 in January from 38.6. The month's reading represents an all-time low. Economists had been expecting a slight increase to 39.

Many investors view the dollar as a less-risky alternative to assets like stocks and high-yield currencies, which are more volatile. As a result, the dollar often advances on gloomy economic news.

But by 4:05 p.m. ET, the dollar was down 0.06% against the 15-nation euro, which was trading at $1.3197.

"What we're still in right now is a sideways, directionless market," said Brian Dolan, chief currency strategist at Forex.com.

Market volatility has left investors flip-flopping, he added.

"If you have a view on the market, it's probably good for about 3-6 hours," Dolan said. "At the first hint of reversal, people bail out. Conviction is extremely low, and it's a very fluid environment to say the least."

The Japanese yen fell 0.12% against the dollar, to ¥88.99. But the greenback fell 1.25% against the British pound, which rose to $1.4168.

While it's clear the U.S. is in the midst of a bad economic downturn, investors remain uncertain about how much of that weakness is already priced into the market, Dolan said.

President Obama's fiscal stimulus announcement in mid-February will be a major turning point, he said.

"The market is going to make a verdict: Either it will have confidence the stimulus will work, or the plan won't really change anything," he said.

Tom Benfer, director at Bank of Montreal, said he expects investors will want to avoid risk in the short term, which will boost the dollar.

"It depends on whether numbers get worse," he said. "We're still a good 6 months away from any type of a recovery, and that makes investors nervous. It's difficult for investors to add risk when the data are so poor."

The euro will remain weak in the short term, Benfer predicted, adding that he expected it will trade in the $1.28-$1.32 range, and even lower in the coming weeks: between $1.20 and $1.25.

Dolan said the market's conventional wisdom seems to say that fourth-quarter 2008 was "the worst, and this current first quarter is bad but not quite so much."

But the greenback's fate is likely tied to investors' opinions on the fiscal stimulus and TARP announcements, he said, which could weaken the dollar.

"I wish there were a set time and place for these decisions, but it's just not one of those things," Dolan said.