The U.S. dollar rallied to a two-week high against a basket of currencies Tuesday as worries about a deteriorating global economy prompted investors to shun riskier assets and flock to the safety of the greenback.
A sell-off in stock markets worldwide further dampened investors' appetite for risk, boosting demand for the dollar and the Japanese yen. A break of the recent trading ranges further exacerbated selling pressure on the euro, analysts said.
"We had built into a consolidation range since the lows on Oct. 27th and what we're seeing today is a break of the euro and the pound to the downside out of that consolidation range,'' said Brian Dolan, head of currency research at Forex.com in Bedminster, New Jersey. "The lower it goes, the greater the weakness.
"The overall driver is just the slowing global outlook and the dollar generally does a bit better in that environment, not to mention that the selling is focusing on the eurozone, UK and Australia, all of which are facing incoming weak data that likely will continue to highlight downside risks in their economies,'' he added.
In midday trading in New York, the ICE Futures U.S. dollar index, which tracks the value of the greenback against a basket of six currencies, was up 1.3 percent at 87.081 after rising as high as 87.177, the strongest level since Oct. 28.
The euro also fell to a two-week low at $1.2519 and last traded down over 1 percent at around $1.25.
U.S. stocks tumbled as production cuts at aluminum maker Alcoa , fears of a cash drain at automaker General Motors and signs the Chinese economy is faltering heightened fears of a global economic slump.
"With the depressing news on the global economy continuing to spill out, the U.S. dollar and the Japanese yen rally,'' said Andrew Busch, global FX strategist at BMO Capital Markets in Chicago. "The recession is spreading as the credit crisis winds blow the radioactive waste further and further throughout the world.''
The yen traded broadly higher as worries over slowing growth kept up the pressure on carry trades, in which low-yielding currencies like the Japanese currency are used to buy assets in higher-yielding ones.
The dollar last traded down at above 97.5yen and the euro fell almost 2 percent to below 122.5 yen .
Higher-yielding currencies tumbled, with the Australian dollar trading 2.6 percent lower at US$0.6523 .
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The euro came under pressure despite a better-than-expected reading in a key German indicator survey, weighed down by steep losses in crude oil and U.S. stocks.
"For the currency market, the decline in oil prices is bullish for the U.S. dollar and Japanese yen, but bearish for the euro,'' said Kathy Lien, director of currency research at GFT Forex in New York. "Since the beginning of the year, there has been a 70 percent positive correlation between the euro/dollar and the price of oil.''
In other trading, sterling was battered as it fell to its lowest in 12 years on a trade-weighted basis and hit a record low against the euro on concerns that the UK economy will suffer even more than the euro zone economy.
The euro hit a record high against sterling of 82.14 pence , according to Reuters data while the pound fell 1.3 percent against the dollar to $1.5412 .
Also on Tuesday, Russia's central bank let the ruble weaken against a euro/dollar basket beyond the 30.41 level it has defended in recent months, spurring speculation of further gradual depreciation.