The dollar rose to a one-month high against a basket of major currencies on Tuesday as growing signs that US credit market turmoil is spreading overseas left investors seeking safety.
News that a Canadian trust was not able to repay some short-term debt sent investors slashing their bets against the greenback, particularly after last week's news that French bank BNP Paribas had frozen some funds because of subprime concerns.
"Across global asset prices, it looks like there is some position unwinding going on and that is filtering through to FX where some of the biggest positions are long euro, long sterling and short dollar," said Sophia Drossos, currency strategist with Morgan Stanley in New York.
"That is a big driver of what is going on right now," she added. The dollar index, a gauge of the greenback against six major currencies, rose 0.5 percent to 81.486. It had fallen to a 15-year low of 79.957 last week. The euro was down 0.5 percent to $1.3532 the lowest in six weeks. It began to weaken overnight after reports that Spanish bank Santander is facing up to 2.2 billion euro ($3 billion) exposure to high-risk US loans.
Against the yen, the euro was down 1 percent at 159.26 yen while the dollar was down 0.5 percent at 117.63 yen, as major US stock indexes all fell more than 1 percent.
The equities markets on Wall Street continued to dictate the yen's direction. For the past several weeks, falling stocks have usually been interpreted as weakening appetite for risk, lifting the yen. Sterling dipped below $2.00 after UK July inflation came in below the Bank of England's 2 percent target rate for the first time in over a year. It last traded at $1.9980 against the dollar, down 0.7 percent.
The Canadian dollar fell more than 1 percent to C$1.0660 per US dollar after two Canadian trusts said on Tuesday that they were unable to place asset-backed deals.
On Monday, niche Canadian investment bank Coventree Inc said the credit problems caused by losses in the US subprime mortgage sector had left it unable to replace maturing debt. "We got a bit of news out that there might be more trouble up here in the asset-backed subprime sector," said Shaun Osborne, chief currency strategist at TD Securities in Toronto.
While global economic growth for now is on pace for roughly 5 percent, signs of slower growth in a few major economies surfaced overnight. The euro faced pressure as expectations of a rate hike in the euro zone were offset by weaker-than-expected growth data and further European Central Bank action to calm short-dated money markets.
That contrasted somewhat with US data showing the US trade balance unexpectedly narrowed in June, while July producer prices rose more than expected. "We have a change in perception about Europe, with investors now realising the region is not immune to the credit crunch coming from the US, and that is putting a lot of pressure on the euro," said Matthew Strauss, a senior currency strategist at RBC Capital in Toronto.
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