The dollar fell to one-week lows against the euro and Swiss franc today after surprisingly poor results at a US Treasury auction and losses on Wall Street in the previous session.
A better-than-expected US services sector report failed to give lasting support to the dollar as stocks turned tail after the sale of $24 billion in three-year notes as part of $60 billion quarterly refinancing drew a tepid response.
This drove the yield on the benchmark 10-year bond higher, sparking concerns higher borrowing costs could hinder a pick-up in the US economy.
"There are worries about the fixed-income market because the auction wasn't healthy and that's feeding back into stock markets - it's bit of a chicken and egg problem because a re-rating of US growth is bringing higher yields," said Mr Trevor Dinmore, currency strategist at Deutsche Bank.
The White House last month forecast that the federal budget deficit would rise to a record $455 billion in 2003 - and then $475 billion next year. Much of this is financed by non-US investors purchasing US assets such as stocks and bonds to the tune of over $4500 million per day.
By 8:30 a.m., the dollar had fallen to $1.1427 from a high yesterday of $1.1304.