LONDON, Dec 8 (Reuters) - The dollar fell sharply against the euro and a basket of currencies on Monday as talk of an imminent bailout deal for stricken U.S. automakers boosted equities and helped to quell extreme levels of risk aversion.
European shares rose 5 percent while the low-yielding Japanese and U.S. currencies fell against the Australian dollar, sterling and other currencies perceived in the market to be high-risk due to their higher yields.
Analysts said expectations that a rescue of the "Big Three" U.S. automakers will materialise, along with more stimulus measures from governments around the world was helping to calm a recent sell-off in risky assets.
Some added that this was cooling risk aversion even after figures late last week painted a grim picture of U.S. employment, with non-farm payrolls declining by 533,000 in November, the biggest drop in over three decades [nN07460314].
"The economy continues to deteriorate beyond expectations but that is now met on the other side with a more pro-active policy stance," said Michael Hart, currency strategist at Citigroup in London.
"These two elements are pulling in two directions and that's why we're seeing such volatility," he said, adding that impact fiscal stimulus plans were helping to push the dollar lower.
By 1138 GMT, the euro traded 1.1 percent higher at $1.2868, after jumping as high as $1.2915, its highest level since late November. The dollar index .DXY fell as low as 85.725, its weakest in more than a week.
The single currency rose 1.6 percent to 120.20 yen, having climbed as high as 120.98 yen as the euro was boosted by higher regional shares.
Stock market gains are seen as a sign of easing risk aversion and can curb demand for the yen, which tends to grow when risk-taking declines and carry trades are unwound.
"Higher stocks are driving everything at the moment and currencies are trading in line with this, with higher yielders gaining and lower yielders on the defensive," said Adam Cole, global head of FX Strategy at RBC Capital Markets.
