The dollar hit a three-year high against a basket of currencies on Monday as news that the U.S. government is set to pour more money into the embattled American International Group fueled safe-haven buying of the U.S. unit.
The euro also came under pressure as a summit of European Union leaders rejected a mass bailout of countries in central and eastern Europe, agreeing only to look at them on a case-by-case basis.
Sources said overnight that the U.S. government is to throw a new $30 billion lifeline to the insurer AIG (AIG.N) as it prepares to report what is expected to be the biggest quarterly loss in corporate history later on Monday.
The news stoked further concerns about the beleaguered financial sector, pushing European shares .FTEU3 down 3 percent in early trade following heavy losses in Asia.
This benefited the dollar, which continues to be viewed as the main safe haven currency.
Further concerns came as HSBC HSBC.L launched a 12.5 billion pound rights issue at a deep discount after annual profit fell and bad debts rose in the U.S.
"There's a roll call of reasons to stay risk averse -- the news from AIG, HSBC and worries about eastern Europe and that is benefiting the dollar," UBS currency strategist Geoffrey Yu said.
He added that the euro in particular has come under pressure against the dollar after EU leaders were considered not to have reached any meaningful agreement on eastern Europe.
"The market is still very negative on the euro and signs of division in Europe and suggestions that Germany is turning its back on eastern Europe are not helping," he said.
At 0843 GMT (3:43 a.m. EST), the dollar index was up 0.6 percent at 88.707 .DXY, just shy of an earlier session high of 88.822, its highest level in almost three years.
The euro fell 0.7 percent to $1.2579, not far off a three-month low.
The dollar dipped 0.1 against the yen to 97.42 yen, though the Japanese currency gained more against other units, with the euro down 0.8 percent at 122.53 yen.
Traders and analysts said the yen has gained against currencies other than the dollar as market participants are now considering that they may have got ahead of themselves in establishing very short yen positions recently.
Meanwhile, analysts said the news on AIG, which follows a new rescue plan for Citigroup, added to fears that more financial firms may need similar rescue plans.
"The market has become increasingly concerned that the need for rescues is broadening to other major U.S. banks after Citigroup and AIG," said Kengo Suzuki, a currency strategist for Shinko Securities in Tokyo.
Investors will be looking to upcoming data, including Monday's U.S. manufacturing index from the Institute for Supply Management and jobs data later this week for more clues on the depth of the recession.
