© Reuters.  Dollar extends recovery but outlook remains clouded© Reuters. Dollar extends recovery but outlook remains clouded

Investing.com – The dollar extended early gains against a currency basket on Tuesday, continuing its recovery from last week’s three year lows, but the outlook remained clouded by concerns over the outlook for the U.S. fiscal deficit.

The U.S. dollar index, which measures the greenback’s strength against a basket of six major currencies, was up 0.51% at 89.53 by 10:28 AM ET (15:28 GMT).

The index has recovered after sinking to a low of 88.15 on Friday, the weakest level since December 2014.

The dollar has weakened in recent months as expectations for a faster pace of interest rates by the Federal Reserve have been offset by a range of bearish concerns.

The greenback has been hit by worries that large corporate tax cuts and increased government spending will negatively impact the U.S. fiscal deficit, which is projected to balloon to near $1 trillion in 2019.

The tax cuts and spending plans could backfire by overheating an already strong economy and causing an unwanted pick-up in inflation.

Expectations for a faster rate of monetary tightening outside the U.S., which would lessen the divergence between the Fed and other central banks, have eroded the dollar’s relative yield attraction for investors.

The dollar was higher against the yen, with USD/JPY rising 0.51% to 107.12, extending its bounce from Friday’s 15-month lows of 105.55

The euro was lower, with EUR/USD down 0.48% to 1.2346, retreating further from Friday’s three year high of 1.2554.

In the euro zone, data on Tuesday showed that economic confidence among German investors declined in February, but the outlook for the euro area’s largest economy still remained strong.

Sterling was a touch lower against the firmer dollar with GBP/USD last at 1.3990, off early lows of 1.3931.

The pound was boosted by renewed optimism over Brexit, following a report that the European Parliament is drawing up a plan to give Britain “privileged” access to the single market.

The euro fell to the day’s lows against sterling following the report, and EUR/GBP was last at 0.8823.

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