By Elizabeth Howcroft
LONDON, Sept 22 (Reuters) - The tide of risk-aversion which saw the dollar hit new six-week highs early on Tuesday ebbed as the session wore on, as European equity markets rose, the dollar's gains paused and riskier currencies recovered some losses.
Stocks sold off on Monday and the currency market saw "risk-off" moves, with the dollar index climbing to its highest in six weeks.
The dollar continued its ascent in early London trading on Tuesday and riskier currencies fell, as investors feared new lockdown measures to combat a second wave of COVID-19 infections would pose a threat to the global economic recovery.
The morning's moves eased as the session went on, and the dollar was broadly flat on the day at 93.532 versus a basket of currencies at 1102 GMT, still up 0.6% on the week =USD.
"The dollar looks as if it's got a broad enough base for a bit of a bounce, that this can last for a while," said Kit Juckes, head of FX strategy at Societe Generale.
The UK will see further restrictions on activity, although Prime Minister Boris Johnson is expected to stop short of announcing a full national lockdown like that imposed in March.
In Spain, the army has been asked to help fight a coronavirus surge in Madrid, while restrictions in other European countries were announced last week, with Germany describing the situation as "worrying".
"The terms 'second wave' and 'lockdown' have been with us for a while, but so far the markets reacted only moderately cautiously to the negative news flow," said You-Na Park-Heger, FX analyst at Commerzbank.
"However, as the situation seems to be deteriorating, particularly in Europe, the markets nonetheless seem to be getting nervous at this stage," she said.
Park-Heger said that even though Commerzbank does not expect more extensive lockdowns, the possibility may weigh on market sentiment for some time.
"A rapid correction of yesterday's move is therefore unlikely to be seen any time soon," she said.
Riskier currencies extended their losses against the dollar in early trading and recovered as the session wore on.
The Australian dollar, which fell to a one-month low at 0735 GMT, was flat on the day at 0.7224 per dollar at 1104 GMT AUD=D3.
The New Zealand dollar was up 0.1% at 0.6676, reversing earlier losses NZD=D3.
The Reserve Bank of Australia said it is assessing policy options including currency market intervention and negative rates, which added to pressure on the Australian dollar in the Asian session.
"Coupled with the Nov US Presidential elections, the outlook for risk assets is likely to be tricky for coming weeks and months," wrote ING strategists in a note to clients.
ING said that it did not expect the dollar to see long-lasting gains, however, as dollar liquidity was not an issue as it was in March, and the U.S. Federal Reserve would step in if risk sentiment fell further.
"For DXY, we expect the 94.00 level to be strong resistance this week," they said.
The euro was down 0.1% against the dollar at $1.17555 EUR=EBS, while the dollar resumed its recent pattern of losing out to the yen, with dollar-yen down 0.2% at 104.460 JPY=EBS.
The Swedish and Norwegian crowns also fell. The Norwegian crown reached a two-month low of 9.3615 against the dollar at 0725 GMT NOK=D3 and was at 9.318 at 1106 GMT, still down 0.3% on the day.
Sweden's Riksbank kept its rate unchanged at 0%, as expected, and said it is expected to remain there in the coming years.
U.S. Fed Chair Jerome Powell will speak at a congressional committee from 1430 GMT.
(Reporting by Elizabeth Howcroft, editing by Larry King and Catherine Evans)
((Elizabeth.Howcroft@thomsonreuters.com; +44 02075427104;))
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