The dollar rose to a 7-1/2 year peak against the pound on Tuesday on rising risk aversion amid UK banking sector concerns, while the euro fell to a six-week low against the greenback on concerns about a deep recession in the euro zone. Anticipation that Barack Obama's stewardship of the U.S. economy after his inauguration as U.S. president will be better than his predecessor also boosted demand for the U.S. currency. U.S. markets were closed on Monday for the Martin Luther King holiday. Sterling was down around 3.5 percent against the dollar and was on track to post its biggest drop since 1992, after the Royal Bank of Scotland (RBS.L) on Monday announced the biggest losses in UK corporate history. [ID:nLJ123391]. "Ongoing concerns about the global economic and financial environment are weighing on the currencies, with the dollar providing a safe harbor in a very nasty storm," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York, in a research note to clients. Escalating concerns that more euro-zone nations may face credit ratings downgrades dragged down the euro, overshadowing a bigger-than-expected improvement in the German ZEW economic sentiment survey. Midway through the New York session, sterling had fallen as low as $1.3860, its weakest level since mid-2001. A smaller-than-forecast fall in the UK inflation rate for December briefly helped stem sterling's sharp fall, but that was short-lived. [ID:nONS004006]. The euro traded 1.5 percent lower at $1.2912, having tumbled as low as $1.2895, according to Reuters data, its weakest level since Dec. 10. Concerns about the health of the euro-zone economy remained rampant after the European Commission on Monday forecast the economy in the euro zone would contract 1.9 percent in 2009 and Standard & Poor's downgraded Spain's credit rating. [ID:nLJ682215] and [ID:nLJ632098]. Analysts said investors are concerned that the European Central Bank will have to cut interest rates further after the 50 basis point reduction to 2.0 percent last week in order to stave off a deep recession in the euro zone. "Selling the pound and the euro against the dollar and the yen proves to be the trade of least resistance," said Ashraf Laidi, strategist at CMC Markets in London. The European currency drew little cheer from the ZEW institute's announcement that its German economic sentiment index improved to -31.0 in December from -45.2, and compared to expectations of -44.0 [ID:nLK468724].

Source