The dollar hit two-year highs against the euro and a currency basket on Thursday as hobbled global shares highlighted the possibility of a looming recession and encouraged investors to continue cutting risk exposure.
The low-yielding yen hit a six-year high against the euro and its strongest versus the dollar in seven months as traders rushed to unwind risky carry trades in acknowledgement that initiatives to rescue the banking sector would likely take a serious toll on the world's economies.
The yen and the dollar have continued to surge against higher-yielding currencies this week as risk demand has shrivelled. Evaporating liquidity has led to severe volatility in most markets, and analysts said currencies remained vulnerable to erratic moves. "It's a fast-moving market, and in general, risk aversion is high," said Tom Levinson, currency strategist at ING.
"The strongest performers are the low-yielders like the dollar, Swiss Franc and the yen," he said, adding that while gains in those currencies have been extreme, the trend is unlikely to end anytime soon. Some market participants said dollar strength was being driven by demand from US funds, including hedge funds, selling debt for dollars in preparation to pay out upcoming redemptions.
Investors awaited a weekly reading of US jobless claims due later in the day, as well as government testimony from a raft of US financial heavyweights, including former Federal Reserve Chairman Alan Greenspan, and senior US Treasury official Neel Kashkari. By 1100 GMT, the euro was down 0.2 percent on the day at $1.2822, trading close to a two-year low of $1.2726 hit on electronic trading platform EBS earlier in the day.
Versus a basket of currencies, the US currency was at 85.658, near 86.070 hit earlier on Thursday for the first time since late 2006, as a 2.4 percent fall in European shares kept demand low for riskier investments. The dollar was bolstered as trouble in emerging markets compounded worries about the outlook for the global economy, with countries such as Hungary and Argentina taking desperate measures to shore up their ailing economies.
The dollar traded 0.2 percent lower at 97.70 yen, after falling to a seven-month low of 96.85 yen according to EBS. The euro was little changed at 125.35 yen, having hit a fresh six-year low of 123.43 yen. Sterling traded 0.4 percent lower at $1.6225, after tumbling to a five-year low against the dollar around $1.6150 on Wednesday as concerns about the country's vulnerability to the financial crisis remain.