The U.S. dollar rose 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 to 89.01 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 2.1% to $1.3792 versus the dollar, down from $1.4008 late Friday.
The British government's weekend announcement that it would take majority control of Lloyds Bank in return for insuring further losses on its assets added to the downdraft Monday. 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. 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 pared some of its losses against the dollar and was last down 0.2% at $1.2628.
On Wall Street, U.S. stocks edged lower in volatile trading, with the Dow Jones Industrial Average dropping 20 points, or 0.3%, to 6,605. See Market Snapshot.
Earlier, the euro hit an intraday low of $1.2554.
"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 fell to fresh 12-year lows Monday.
