The dollar rallied broadly for its best day in more than a month on Thursday and the euro tumbled to an eight-month low as mounting concerns about the global economy drove investors to seek safety and liquidity. A dismal economic outlook from the US Federal Reserve coupled with new signs of slowing in China and Germany sent investors out of stocks and other bets on growth and into dollar-denominated assets such as Treasuries.
"I think the dollar's outlook is as fickle as the market. For now, people are seeing the dollar as a safe haven, as Japan and Europe are going through a political crisis and as China slows down," said Paul Dietrich, chairman and chief executive officer of Foxhall Capital Management in Orange, Connecticut.
The ICE dollar index rose to 78.400, up 1.4 percent, its largest one-day gain since early August. The euro fell on lingering uncertainty about whether Greece will receive its next tranche of aid from its creditors, which is crucial to the country avoiding default. Suggesting further losses, the eurozone common currency slid through the 50 percent retracement level of the move from the June 2010 low to the May 2011 peak, hitting a session low of $1.3384, its weakest since January 20.
In late afternoon New York trade, the euro traded down 0.7 percent at $1.34710 on electronic platform EBS. Implied volatility, a measure of the options market's expectations of price movements, in euro/dollar have swung higher to at least a 2-1/2-year peak at 18.0 percent. Vols predict how much a currency may move up or down over a given time frame, providing the basis for an option's price. As vols rise, so do option prices.
Barclays Capital has revised lower its forecast for euro/dollar in the short term, expecting the pair to fall to $1.33 in one month and $1.25 in three months. The dollar was down 0.3 percent against the yen at 76.220. With the yen not far from the record high of 75.94 set last month, investors are on high alert for intervention by the Bank of Japan to contain the currency's strength.
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