The dollar climbed against the euro and the pound as investors sought refuge in the U.S. currency after stocks fell and the government said it will raise its stake in Citigroup Inc. in a third attempt to bail out the bank. The U.S. currency also headed for its biggest monthly gain since 1995 against the yen. Eastern Europe currencies including the Hungarian forint and Polish zloty rose against the euro on speculation international aid packages will bolster the region’s banking system and revive economic growth. The pound fell as consumer confidence held near the lowest level in 30 years. “European stocks are down sharply and this looks like a fresh burst of risk aversion kicking in,” said Simon Derrick, chief currency strategist in London at Bank of New York Mellon Corp., the world’s biggest custodian of financial assets. The U.S. currency strengthened to $1.2651 per euro as of 7:17 a.m. in New York, from $1.2744 yesterday, and to $1.4195 per pound, from $1.4317. It fell to 97.64 yen, from 98.52 yesterday, paring its monthly gain to 8.6 percent. The euro was at 123.53 yen, from 125.52. The MSCI World Index dropped for a third day, sliding 0.7 percent, and every major stock market in Europe declined. The cost of protecting European corporate bonds from default rose, according to traders of credit-default swaps, with contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings gaining 18 basis points. Citigroup Capital The Citigroup plan will involve the Treasury Department converting as much as $25 billion of preferred shares into common stock, the Treasury Department said in a statement today. The government said it will make the swaps only if private holders agree to the same terms. The U.S. doesn’t immediately intend to inject additional money after channeling $45 billion to the New York-based company last year. Hungary’s forint strengthened as much as 1.6 percent versus the dollar, the Polish zloty appreciated as much as 0.8 percent and the Czech koruna rose as much as 0.6 percent after the World Bank, the European Bank for Reconstruction and Development and the European Investment Bank earmarked about $31 billion to help central and east European banks and businesses cope with the financial crisis. The ICE Dollar Index, which measures the U.S. currency’s performance against those of its main trading partners such as the euro, the yen and the pound, rose to 88.211, from 87.727 yesterday. Forecast Change The dollar will strengthen to $1.23 per euro within a month, Barclays Plc said, revising a previous forecast that anticipated a decline for the U.S. currency. Higher Treasury yields relative to German government bonds will stoke the U.S. currency’s gains, before it weakens again on concern U.S. borrowing is ballooning, David Woo, global head of foreign-exchange strategy in London at Barclays, wrote in a note today. Barclays kept its year-end forecast of $1.45 per euro. The difference in yield, or spread, between German and U.S. 10-year government notes narrowed to 12 basis points, or 0.12 percentage point, today, near the least since November. “There is a compelling case to be made that Treasuries should underperform euro-zone government bonds in the near term,” Woo wrote. “The dollar’s strength will prove unsustainable and we expect it to come under renewed selling pressures in the second half of the year.” ‘No Alternatives’ The plunge in the yen and Swiss franc has left the dollar, the world’s leading reserve currency, as the only refuge from the economic turmoil, according to the world’s biggest foreign- exchange traders. Japan’s crumbling economy combined with an end to the unwinding of the carry trade weakened the yen, last year’s best performing currency, by 7.2 percent this year, even after a 0.9 percent gain today. The franc suffered from a deteriorating Swiss financial system and threats of intervention by the central bank to push the currency lower against the euro. “There are no alternatives to the dollar right now,” said Geoffrey Yu, London-based strategist at UBS AG, the world’s second-biggest currency trader. “Investors see the rest of the world collapsing, and the yen is no longer a safe haven.” The yen rose today after its relative strength index, a technical chart used by traders to indicate changes in price direction, dropped to 23.270 yesterday, the lowest level since 2004. The index climbed to 29.905 today. A reading below 30 typically indicates that an asset price may rise. ‘Euro Breakup’ The pound weakened against the dollar and the euro after a GfK NOP index showed U.K. consumer confidence stayed near a three-decade low, GfK NOP said today. In a separate survey, GfK NOP said more than 40 percent of British mortgage holders may see their loans exceed the value of their homes by year-end. Bank of England policy maker David Blanchflower said this week the recession will probably deepen “significantly.” The U.K.’s FTSE 350 Banks Index fell 7.3 percent today, the most in two weeks.

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