Dollar Surges to 13-Month High vs Euro, Yen Gains

The U.S. dollar rallied to a fresh 13-month high against the euro Monday, while the yen surged across the board as fears over bank troubles in Europe mounted and investors shunned riskier assets.

Traders sold the euro, pushing the euro zone's single currency below $1.35 versus the greenback as leaders of Europe's four biggest economies decided against a coordinated bailout plan at a weekend summit and their governments were forced to rescue large banks and protect ordinary depositors.

Risk aversion remained a dominant theme in the currency market, which saw the yen rallying sharply against higher-yielding currencies such as the Australian and New Zealand dollars, as investors unwound so-called carry trades.

The yen was on track for its largest one-day gain versus the dollar since the Asian crisis in 1998, and its best day against the euro since the launch of that currency in 1999.

"What's been driving the market, more broadly speaking, over the past couple of weeks, has been concern about the disintegration in the European financial system,'' said Todd Elmer, currency strategist at Citigroup in New York.

"Ultimately what's come back to haunt the euro is the fact that the institutional framework in the euro area is not conducive to a quick response to combat the crisis,'' he added.

In midday trading in New York, the euro was at above $1.35 after sliding to its lowest since late August 2007 at $1.3474, according to Reuters data.

Against the yen, the euro was down more than 6 percent at below 136.3 yen, after falling to 135.60 earlier—a three-year low.

European banks have been hit hard by the fallout from a crisis that began in the United States when the housing market collapsed and bad mortgage debts multiplied.

More European governments offered bank deposit guarantees as regulators from Washington to Seoul scrambled to contain the deepest global financial crisis in 80 years.

"The market is shunning the euro,'' said Ronald Simpson, director of global currency analysis at Action Economics in Tampa, Florida. "The banking crisis (in Europe) seems to have taken the spotlight over the U.S. and the failure for European officials to come to an agreement on a coordinated type bailout weighed on the euro.''

Europe, U.S. Contrast

The moves in Europe were in stark contrast to the situation in the United States, where the government's $700 billion bank rescue plan was finally passed by Congress on Friday. Analysts said the flexibility that the bailout provides the U.S. economy would help support the greenback.

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The dollar was also helped by strong dollar demand as global money markets remain frozen, analysts said.

The ICE Futures U.S. dollar index, which tracks the unit against a basket of six other major currencies, was up to above 81.5 after rising to 81.713, a 13-month high.

"For the short term at least, it looks like the dollar is maintaining its role as a safe haven despite the problems that we're having here,'' Simpson said. "The direction for the euro is still lower in the near term.''

U.S. stocks also fell sharply on Monday, with the Dow Jones industrial average diving nearly 500 points to below 10,000 for the first time in four years amid concerns the widening fallout from the credit crisis would hurt the economy further.

The dollar was last down to nearly 101.2 yen . Earlier, it fell to a 4-1/2-month low of 100.26, its biggest one-day decline in 10 years, according to Reuters data.

"The yen benefits from the continued contraction in risk appetite and the extremely elevated volatility across asset classes,'' Citigroup's Elmer said. "That contributes to paring back or reversing of exposure on yen-funded carry trades and I just expect that phenomenon to continue.''

The Australian dollar plunged more than 11 percent against the yen to a four-year low as investors were forced to dump long-standing carry trades funded by cheap borrowing in the Japanese currency.

The Aussie dollar also plunged against the U.S. dollar to a four-year low at US$0.6999. It last traded at US$0.7105, down 8.2 percent, on pace for its weakest day in 25 years.

Copyright 2008 Reuters. Click for restrictions.