The dollar made its biggest gain since mid-December against the euro Thursday as investors sold oil, gold and other commodities and repatriated their cash back into the beleaguered U.S. currency.
Oil went down as much as 4 percent, dipping earlier below $99 a barrel, before settling just under $102 a barrel. Commodities such as gold and platinum also dropped following a months-long rally.
As investors slashed their "long" exposure to these assets, they covered "short" positions in the dollar, lifting the currency from historic lows charted earlier this week, traders said.
In late trading in New York, the euro was down 1.4 percent at $1.5414, well off Monday's record high of $1.5904 and chalking up its steepest one-day fall since mid-December. Still, the euro is up 5.6 percent for the year.
In a volatile session for the dollar against the yen , the U.S. currency last traded up 0.4 percent at 99.15 yen, after trading as high as 100.20 earlier in the session.
At various times during the New York session a flow-driven market, and losses on the euro/yen cross weighed on the dollar against the yen but with stocks rising, investors took on more risk and ultimately bought the dollar against the yen.
Against the Swiss franc, the dollar bounced 1.5 percent to 1.0111 francs.
"Commodity markets and currencies are very interconnected and as we see the system deleverage positions in oil and gold, the dollar is bouncing back," said Camilla Sutton, a currency strategist at Scotia Capital in Toronto.
Analysts said the proximity of Easter holidays in Europe and the United States may be leading some investors to reduce dollar shorts ahead of the long weekend.
Pressure on the euro also mounted after Credit Suisse Group said it might not make a profit in the first quarter of 2008 because of write-downs on debt securities. Credit Suisse shares were down 10 percent in European trading.
"Europe has also been hit by problems in the financial system," said Sutton at Scotia Capital.
With Federal Reserve official interest rates of just 2.25 percent, already the second lowest among major economies and set to fall further, the U.S. currency's potential for gains may be limited.
Markets are pricing in around a 70 percent chance of a 50-basis-point cut at the Federal Reserve's April meeting, adding to 300 basis points of easing administered since September.
"Low interest rates, set to move even lower, and a wide (albeit narrowing) external deficit are a bad combination for any currency, including the dollar," American Express Bank said in a note.
"The credit crisis remains far from over and a prolonged U.S. recession looks likely, with GDP growth staying below trend far into 2009," they said, lowering their dollar forecasts.
The European Central Bank and the Bank of England pumped 15 billion euros and 5 billion pounds, respectively, into the banking system on Thursday via short-term loans to help tide banks over the holiday period.
Trading volumes were lighter than usual as Japan closed for the Spring Equinox holiday and as banks and funds scrambled for funds over the long Easter weekend.
Financial markets in the U.S., Canada, France, Germany and Hong Kong will be closed Friday. Japan, however, will be open.
Most of Europe will also be closed on Monday.