The dollar surged to a one-month high on Tuesday as a sharp drop in crude oil pricesand an unexpected rise in U.S. consumer confidence in Julybuoyed demand for riskier assets and sparked a rally on Wall Street.
Analysts said Merrill Lynch's announcement late on Monday of yet another write-down and capital-raising exercise also helped support the dollar, as they raised hopes the turning point in the year-long credit crisis was close.
"It's a combination of oil, equities and the slight improvement in consumer confidence. The (light) summer liquidity conditions could be a factor as well," said Vassili Serebriakov of Wells Fargo in New York.
The dollar index, which measures the the dollar's performance against a basket of six currencies, jumped to 73.333, its highest since June 25, according to Reuters data. It was last around 73.318, up 0.9 percent on the day.
Oil fell more than $4 a barrel to below $121, touching the lowest price since May, as signs of weakening demand outweighed a disruption to Nigerian output.
Economists worry that record high oil prices will inflict more pain on the U.S. economy, already hamstrung by a recession in the housing sector.
A decline in oil prices tends to benefit the dollar, as it eases some of the growth concerns.
There was more good news on the economy, with an independent report showing consumer confidence unexpectedly perked up in July, halting a six-month slide.
Poor French Consumer Morale Slaps Euro
Declining oil prices and news that French consumer confidence plunged to a record low for the seventh straight month in July kept investors away from the euro.
The currency dropped as low as $1.5577. It was last trading at 1.5579, down 1.1 percent on the day.
"What we are seeing is a squeeze of short dollar positions. Just looking at the consumer confidence number, I don't think that changes the picture for the U.S. consumer," said David Gilmore, partner at FX Analytics in Essex, Connecticut.
Analysts said Merrill Lynch's announcement of a $5.7 billion third-quarter write-down and $8.5 billion capital raising by selling new stock also helped support the dollar.
"It's a psychological confidence builder for the market. We are seeing Merrill credit default swaps come off sharply. It's having the desired impact on market sentiment," said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey. "The fact that they have gone ahead and disposed of everything of considerable mortgage-related risk raises hopes of turning the corner. The fact they will also raise capital is seen as positive. There is a fair amount of silver lining in that cloud."
The dollar rose 0.7 percent to 108.19 yen as U.S. stocks rallied on the slide in crude oil prices.
The yen was also hurt by news that Japan's jobless rate rose in June to a near two-year high and household spending fell again from a year earlier.
Sterling fell 0.7 percent to $1.9795, weighed down by a report showing British retail sales fell at a record annual pace in July, while approvals for new mortgages hit a record low last month, offering further proof that a deteriorating housing market is battering the overall economy.
Analysts said the French, Japanese and British data was evidence that the effects of the economic slump in the United States were spreading to other regions.
"This is a fairly consistent picture of slowing economic activity and it does suggest that those calling for the decoupling from the U.S slowdown have perhaps been too optimistic," said Wells Fargo's Serebriakov.