Dollar firms as Europe swoons

NEW YORK (CNNMoney.com) -- The dollar could find some support in the weeks ahead as concerns about troubled European economies reemerge and investors look for clues about the Federal Reserve's next move.

Investors had been flocking to riskier currencies such as the Australian and Canadian dollars amid speculation that commodities prices, like oil and copper, would continue rising.

The rebound in risk appetite is also being fueled by expectations that the U.S. central bank is prepared to take additional steps to boost the nation's economic recovery.

But the tone turned cautious late this week after data showed Ireland's economy shrank in the second quarter and a report showed that manufacturing activity across Europe fell sharply in September.

Traders were also caught off guard by the Fed's policy statement Tuesday. It suggested that the central bank is becoming more concerned about the prospect deflation, a debilitating cycle of falling prices and weak demand.

"The U.S. dollar is getting a leg up on the back of risk aversion," said Dean Popplewell, chief currency strategist for Oanda, a Toronto-based online trading platform.

He said the greenback's reputation as a safe haven should help it continue to regain ground against other international currencies.

"The dollar is still the go-to reserve currency," he said. "In times of risk aversion, people historically gravitate toward the U.S. dollar."

Traders also said the rush to risky currencies over the last few weeks was overdone.

The dollar index, which gauges the greenback against a basket of currencies, rose slightly to 80 on Thursday. That's down from 83.2 at the beginning of the month, and a high above 88 in June.

The dollar was up 0.4% against the euro Thursday after the shared currency rose to a 5-month high on Tuesday. The euro has gained 6% over the last 10 days and is up 13% from its June lows, according to Camilla Sutton, currency strategist at Scotia Capital.

"A period of rest is somewhat overdue for the currency," she wrote in a research note.

Meanwhile, traders said the the yen could remain near a record high against the dollar despite growing speculation that the Bank of Japan is planning another intervention in the market.

Last week, Japanese officials announced a plan to sell yen and buy U.S. dollars. The goal is to curb the meteoric rise of the yen, which has been a major source of concern for Japan's export-driven economy.

But such interventions are rarely successful, according to Popplewell, who said the Swiss National Bank has been intervening in the currency market for months to little avail.

In addition, he said the move was hindered by signs the Fed could resume buying U.S. Treasurys later this year.

The policy, which investors have dubbed QE-2, is designed to lower long-term interest rates and juice the economy. But the move would "nullify any BOJ objective" because it would weigh on the dollar and, by extension, support the yen, said Popplewell.