The dollar rose against the euro on Wednesday as a string of weak US economic reports renewed worries of a deepening economic recession, leading investors to seek the greenback as a safe haven. Dollar gains versus the euro recently have been linked to repatriation of funds and extreme risk aversion instead of economic fundamentals, analysts said.
The demand for safety increased on Wednesday as US economic data showed a much larger drop in durable goods orders last month, and weak readings on new-home sales, business activity in the Midwest and weekly jobless claims.
"Overall, the US numbers this morning all have a negative tone to them and that should keep risk aversion higher," said Shaun Osborne, chief currency strategist at TD Securities in Toronto.
US durable goods orders plummeted in October and business activity in the Midwest withered to the lowest level since the severe 1982 recession. In addition, sales of newly built US homes dropped sharply in October and were running at levels last seen more than 17 years ago. Lien also said she expects thin trading after the US Thanksgiving Holiday on Thursday to exacerbate volatility in the currency markets on Friday.
As the New York session began to close, the euro was 1.3 percent lower against the dollar at $1.2885. The dollar also gained 1.7 percent against the Swiss franc to 1.5324 francs, while sterling slipped 0.9 percent against the dollar to 1.5327.
Demand for the euro also fell as investors were pessimistic about whether a European stimulus package will be sufficient to ease the financial crisis. The currency hit a session low versus the dollar after the European Central Bank said falling price pressures in the euro zone have left "ample room" to move on interest rates.
The European currency was last 0.9 percent lower at 123.26 yen. The dollar gained against the yen, reversing earlier declines on the day, as US stocks rose, led by beaten-down large-cap technology shares that investors considered to have fallen too far, too fast. The dollar last traded 0.5 percent higher against the yen at 95.68 after declining to as low as 94.62.
The dollar has generally fallen or gained against the yen in recent months as risk tolerance rose and fell, illustrated by swings in the stock market. Wednesday's gains in stocks offset concerns about whether the Federal Reserve's plan would be effective.
The yen has rallied in the past month as risk aversion has triggered a massive unwind of carry trades, in which investors used the low-yielding yen to fund purchases of assets in higher-yielding currencies. The Japanese currency was also pressured after China surprised markets with a 108 basis point rate cut its largest since 1997. The yen is often used as a proxy for the Chinese yuan, which trades in a tight band against the dollar.