The U.S. dollar rallied against other major currencies Monday, as falling global equity markets and worries over the world economy boosted safe-haven demand for the greenback.
The dollar index which measures the currency against a trade-weighted basket of six global counterparts, rose 0.7% to 89.43, up from around 88.850 in North American trade late Friday. The index last week surged to its highest level in nearly three years.
A weekend warning by the World Bank that the global economy would likely shrink in 2009 for the first time since World War II added to negative sentiment, strategists said.
The World Bank said its forecasts show the world's economic growth will be at least 5 percentage points below potential. Global industrial production by the middle of 2009 could be as much as 15% lower than 2008 levels. See full story.
"The U.S. dollar is firmer against most major currencies amidst heightened concerns about the financial sector and the global economy," said currency strategists at Brown Brothers Harriman.
"Sterling is one of the hardest hit after weekend news Lloyds bank and possibly Barclays would cede shares to the government in exchange for participation in the government's Asset Protection Scheme," they said in a research note.
The British pound tumbled 2.3% to $1.3763 versus the dollar, down from $1.4008 late Friday.
The British government's weekend announcement that it would take majority control of Lloyds Bank (UK:LLOY: news , chart , profile ) in return for insuring further losses on its assets added to the downdraft Monday. See full story.
Sterling has been under additional pressure since the Bank of England said Thursday it would move to boost the money supply by purchasing up to 75 billion pounds ($106 billion) in U.K. government bonds, or gilts, and other securities over the next three months. Read about the BOE's quantitative easing plan.
The 10-year gilt yield tumbled to a new record low below 3% Monday morning as gilt prices extended sharp gains in the wake of the announcement. Yields move inversely to price.
Euro under pressure
The euro fell 0.7% to $1.2567 from $1.2641 in North American trade late Friday.
"The euro too has been dragged lower as markets remain concerned about European bank exposure to Eastern Europe," with Latvia's Premier-designate Valdis Dombrovskis warning the country may be bankrupt in three months if it does not make budget cuts required under its arrangement with the International Monetary Fund, said analysts at Brown Brothers Harriman.
Dombrovskis said in an interview last week that if Latvia doesn't receive the next portion of its IMF loan, the country would go bankrupt in June, according to a report by Bloomberg News.
Latvia has been one of several countries in Eastern Europe that have been so hard hit by the global crisis that they have received financial support from the IMF.
Investors have been focused in recent weeks on the vulnerability of Western European banks that have subsidiaries in Eastern Europe, though some regulators and banks operating in the region have called the risks exaggerated and oversimplified.
European shares were also lower and U.S. stock index futures slumped. See Europe Markets. Read Indications.
Tokyo's benchmark Nikkei 225 Average closed at its lowest level in 26 years, tumbling 1.2% to finish at 7,086.03. The index slumped after data showed Japan's current-account balance swung to a deficit for the first time in 13 years. Read Asia Markets.
The dollar rose 0.7% to 99.03 yen versus the Japanese unit, up from 98.37 yen late Friday.
In recent months, the dollar has usually moved higher versus major rivals as equities have sold off, boosted by repatriation, deleveraging and haven-related flows.
A light round of economic data in the United States and Europe this week will likely provide little direction for foreign currency markets this week, wrote strategists at Commerzbank in Frankfurt.
"Risk aversion should remain at elevated levels, providing the U.S. dollar with some support," they wrote.
February trade data for China, set for release on Wednesday, should be closely watched, the strategists said.
"Some market participants are still confident that the Chinese economy will hold up reasonably well this year -- especially since Premier Wen Jiabao announced [an] 8% growth target," they wrote.
Disappointment in the figures would raise questions about the outlook and boost risk aversion once again, allowing the U.S. dollar to further cement its haven status, they said.
But this week's heavy round of government bond issuance could prove to be a key test of dollar sentiment, said analysts at BNP Paribas.
The Treasury Department will auction $34 billion in three-year notes on Tuesday. That will be followed the next day by $18 billion in 10-year debt and $11 billion in 30-year bonds on Thursday.
"The success or failure of these auctions may have a significant short-term impact on the U.S. dollar as the market has been discussing for some time expansionary fiscal policy in the context of the U.S. being able to fund [a massive fiscal stimulus] in the open market," they said.
