Dollar up on euro as China reaction fades

NEW YORK (CNNMoney.com) -- The dollar gained versus the euro Tuesday as optimism about China's decision to let its currency float more freely faded and investors turned to the safety of the greenback.

What prices are doing: The dollar rose 0.3% against the euro to $1.227, but fell 0.7% to ¥90.44 against the Japanese yen.

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The pound jumped 0.4% versus the dollar to $1.4809 after the U.K. announced its harshest budget cut in decades.

What's moving the market: Over the weekend, China announced it would let its currency, the yuan, trade more freely.

The news initially boosted stocks and pressured the dollar as investors became more confident in the global economic recovery.

But the dollar recovered losses midday Monday and rallied against the euro Tuesday as investors recognized that China's move would be gradual and wondered how positive a higher yuan would actually be for the economy.

"The market got excited, but it has lost its enthusiasm and what we're seeing now is a hangover," said Boris Schlossberg, director of currency research at GFT Forex.

"The appreciation of the yuan is going to be very gradual, and at the same time, investors are realizing that there's not necessarily a direct correlation between the yuan's appreciation and global growth" he added.

As a result, "risk currencies" such as the euro, which investors tend to flock to when they are feeling bullish about the economy, lost ground on Tuesday, while the safe-haven dollar became increasingly attractive.

Economy: Weak U.S. housing data released Tuesday also helped boost the dollar.

The National Association of Realtors reported existing home sales fell 2% to a seasonally adjusted annual unit rate of 5.66 million in May, down from an upwardly revised rate of 5.79 million in April.

Sales were expected to have risen to an annual rate of 6.1 million units in May, according to a consensus of economists surveyed by Briefing.com.

Outlook: Schlossberg said he expects the dollar to remain steady during the second half of the year as investors gauge the health of the global economy.

And if growth in the U.S. slows more than expected, the dollar will be the beneficiary.

"I think that global growth will probably slow down in the second half of the year and be more muted than people think," said Schlossberg. "The U.S. is not really having any kind of real consumer revival and Europe is quagmired in massive austerity measures, so this will be enough to maintain positive momentum for the dollar."