The dollar rallied broadly on Thursday, hitting an eight-month high versus the euro as escalating concerns about downside risks to the global economy prompted investors to dump riskier units in favour of the world's most liquid currency. A warning by the US Federal Reserve that the global economy may deteriorate and ongoing speculation about a Greek debt default pushed the euro to $1.3421, its weakest since January, while it plumbed a 10-year low versus the yen.
The dollar jumped as high as 78.594 versus a currency basket, its highest since February, and made gains across the board as escalating risk aversion sparked heavy selling of emerging currencies. "The Fed is just one element that has contributed to the sell-off (along with) concerns about the eurozone and banks' capital," said Geoffrey Yu, currency strategist at UBS.
The low-yielding dollar and the yen are usually sought during times of financial stress and pessimism about global growth. The yen surged across the board, knocking sterling to its weakest ever level, according to Reuters charts. Investors dumped Asian currencies along with the Brazilian real and the South African rand, which were on track to post their biggest daily losses since the global financial crisis in 2008.
The Australian, New Zealand and Canadian dollars each fell more than 2 percent on the day to multi-month lows. Those three currencies are often vulnerable to shifts in the global economic outlook. A European Central Bank study stating that the whole common currency project was in danger due to fiscal imbalances added to the risk-averse environment by highlighting the prospect of a Greek default that could deeply affect other eurozone states. Support for the euro is seen at around $1.3400, the 50 percent retracement of the euro's move from a low of $1.1875 in early June 2010 to a high of above $1.49 in early May 2011.
The Fed on Wednesday unveiled a programme, dubbed "Operation Twist", to bring down long-term interest rates in a bid to help the ailing housing sector, but few think it will be enough to seriously bolster growth. It stopped short of announcing more quantitative easing, which was seen as a factor supporting the dollar. The euro fell as low as 102.24 yen on trading platform EBS, its weakest since mid-2001.
The dollar slipped 0.2 percent on the day to 76.26, keeping the yen near a post-war high of 75.94 yen and raising the risk of intervention by Tokyo authorities. Against the Swiss franc, the dollar rose to 0.9183 francs, its highest since April. The safe-haven franc was also weak against the euro, sliding to its lowest since July as the Swiss currency continued to struggle on talk that the Swiss National Bank may lift its euro/Swiss target to 1.25 from 1.20.