LONDON (AFX) - The dollar failed to capitalise on Wall Street's bounce in early trade as the recent short-covering comes to an end and international investors remain sceptical about the US stock turnaround, dealers said. "Despite the Dow's biggest one day rally since the crash of 1987, the dollar remains generally on the defensive," said Kamal Sharma, currency strategist at Commerzbank. "Many short positions have been stopped out over the last four days and this now clears the way for further declines." As a result, euro/dollar has recovered some of this week's losses and hovers around parity, while dollar/yen consolidated above the 116 level. Hans Redeker, global head of foreign exchange strategy at BNP Paribas, said the euro's rally in the wake of higher equity prices confirms his view that the recent sell off from 1.0210 to 0.9860 was due to margin account position liquidation. Sharma, who remains sceptical about the view that equity markets are key drivers of foreign exchange markets, said it was particularly interesting that international investors failed to lift the dollar. "There's a lot of investor caution about whether this equity market is sustainable," he said. BNP Paribas' Redeker urged caution as well, given the after-hours confirmation from AOL Time Warner that it is being investigated by the Securities and Exchange Commission. Investors will also be looking at Germany's Ifo index today, though the result will have to be substantially divergent from expectations to have much of an impact, said 4CAST currency strategist Paul Bednarczyk. The Ifo index may well reflect stock market falls and growing doubts over the resilience of the recovery in the global economy. The median is for a modest fall although a notable proportion on economists expect no change. Euro zone M3 is expected to be way above the 4.5 pct target, but market participants take very little notice of its growth anyway. Meanwhile, sterling could be affected by UK retail sales data, with economists expecting a slight bounce following last month's 0.6 pct month-on-month decline.