The dollar vaulted to a six-month high against a basket of currencies on Monday, racking up more gains as heightened worries about the global economy's strength sparked a sell-off in the euro and higher-yielding currencies.
The euro fell further below $1.50 after having suffered its biggest one-day drop since January 2001 on Friday, breaking a slew of key chart levels that have convinced some analysts the dollar may be in the process of snapping its seven-year slide.
Hedge funds and other market players have rushed to cut losses by covering short positions in the dollar, unwinding bets favouring the euro, Australian dollar and commodities which had been made in the belief that the global economy could hold up during the US downturn.
Investors were caught off guard by the European Central Bank's acknowledgement last week that economic growth had slowed more than it expected and by a sudden shift in expectations towards interest rate cuts in Australia. But analysts said the dollar's gains were by no means a vote of confidence by investors, who have dumped the US currency throughout the housing crisis and financial sector turmoil in the United States over the past year.
"If the question is: 'Are there factors to chase the dollar higher?', then the answer would be 'no'. The dollar is unlikely to keep extending gains so one-sidedly against the euro," said Shuichi Kanehira, a senior forex trader at Mizuho Corporate Bank.
Dollar gains were kept in check as crude oil edged up early on Monday on worries that the growing conflict between Russia and Georgia could threaten exports from the Caspian region. Oil climbed as high as $116.74 a barrel up from a three-month low hit on Friday.
But oil and the Reuters-Jefferies CRB commodities index have tumbled about 20 percent from their peaks struck a little more than a month ago, giving a boost to the battered greenback.
"The currency and commodity moves look like a massive pain trade," said Matthew Johnson, a senior economist at broker ICAP. "All those short US dollar, long commodities gains of the past six months are being squeezed away." The euro fell 0.2 percent from late US trade to $1.4976 after touching a six-month low of $1.4908 on trading platform EBS in early trade.
After the euro sliced beneath key chart support near $1.53 on Friday, the bottom fell out. The single currency's swift drop took it below the 200-day moving average for the first time in more than four years, suggesting a shift towards a sustained downtrend. Less than a month ago, the euro reached a record $1.6040.
Against the yen, the euro shed 0.3 percent to 164.85 yen. The dollar slipped 0.1 percent to 110.05 yen after hitting a seven-month peak of 110.40 yen. "Markets are presently undergoing a major reconfiguration as investors continue to adjust to signs that the European economy has hit the wall, squeezed by a combination of surging energy prices and tight monetary conditions, overlaid with a credit crunch for good measure," said Darren Gibbs, a senior economist at Deutsche Bank.
That led market players to price in rate cuts for the euro zone, just as they have for Australia and New Zealand. Australia's central bank said on Monday the economy looked to be slowing enough to significantly reduce inflation over time, providing growing scope to ease interest rates.
A variety of major currencies have been battered. Sterling struck a 21-month low of $1.9110 on the Reuters dealing system, while the Aussie hit a 6-1/2 month low of $0.8835 and the New Zealand dollar an 11-month low of $0.6981.
The dollar index, which measures it against a basket of six currencies, punched to a five-month high of 76.192 before pulling back to 75.936. Last week alone, the dollar index soared more than 3 percent for its biggest gain in 3-1/2 years.
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