The US dollar climbed to a fresh one-year high against major currencies on Wednesday and surged to nearly 12-month highs versus the euro, as falling oil prices and a bounce in US stocks overcame worries about the health of financial firms.
The dollar largely shrugged off news that Lehman Brothers, the fourth-largest US investment bank, incurred a third-quarter loss and failed to announce firm deals to raise needed capital. With several banks saying in the last two days that they are still doing business with Lehman, analysts said problems at the troubled institution should not exacerbate the global credit crisis. The dollar is also benefiting from the belief that the US economy may be more resilient than most economies at a time of heightened financial stress.
The dollar saw its largest one month rise in more than a decade in August. In late trading, the dollar index on the ICE Futures Exchange, which measures the greenback's value against a basket of six currencies, climbed to 80.017, the highest since September 2007. It was last at 79.815, up half a percent.
Those gains came as the euro tumbled to a nearly 12-month trough of $1.3995 on the view that economic growth in the euro area could slow more sharply than previously anticipated.
The euro last traded at $1.4000, down nearly 1.0 percent on the day, while US crude futures were down 0.3 percent at $103.00 per barrel. US investors were liquidating their positions in overseas equity and bond markets, repatriating the money back home and lending support to the dollar, analysts said.
US mutual fund flows data has shown persistent selling of foreign equity over the last two months, according to Goldman Sachs. Since July, the investment bank said this data has indicated selling of foreign equity totalling $18 billion.
While this number is not significant by itself, Goldman said in a research note that this number is a reflection of broader trends within the US investment community. Morgan Stanley in a note echoed Goldman's sentiment.
Further pressuring the euro was a move by the European Commission on Wednesday to lower its 2008 euro zone growth forecast to 1.3 percent from 1.7 percent. It reduced its growth estimates for Britain to 1.1 percent from 1.7 percent.
Analysts though said that despite the poor growth outlook, it was unlikely that the European Central Bank would cut interest rates anytime soon even as the Federal Reserve's aggressive easing put the US economy on a recovery path.
The dollar also rose against the yen, ignoring the Lehman news. Analysts cited market talk of possible downgrading of Japan's sovereign debt. The dollar was last up 0.9 percent at 107.80 yen. It climbed 0.7 percent to 1.1340 Swiss francs.
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