The US dollar hit a 7-1/2-year peak against the pound on Tuesday as losses in the UK banking sector raised worries about the country's economy. The dollar also rose against the euro on concerns about a deepening euro-zone recession. Optimism about newly inaugurated US President Barack Obama's stewardship of the economy also boosted the dollar.
The currency pared gains, though, when Obama did not provide details on economic crisis measures in his address. Sterling fell about 3.7 percent against the dollar and was on track to post its biggest daily drop since 1992 after the Royal Bank of Scotland on Monday announced the biggest losses in UK corporate history. "The market is afraid that the UK will turn into the next Spain or Greece," said Kathy Lien, director of currency research at GFT Forex in New York.
"Over the past few months, they have been working overtime to inject more stimulus into the economy, but the more that they spend, the worse impact it has on the UK's fiscal position." Standard & Poor's on Monday downgraded Spain's credit rating, following a similar move on Greece last week.
A European Commission report on Monday that forecast the euro-zone economy would shrink 1.9 percent in 2009 also added to concerns, overshadowing a bigger-than-expected improvement in the German ZEW economic sentiment survey on Tuesday. Late in New York, sterling fell 3.7 percent to $1.3921 after touching $1.3860, its weakest level since mid-2001. A smaller-than-forecast decline in the UK inflation rate for December did little to stem the slide.
The euro last traded 1.7 percent lower at $1.2880, having tumbled as low as $1.2857, according to Reuters data, its weakest level since December 9. Analysts said the European Central Bank may have to cut interest rates further after delivery percent last week. Elsewhere, the dollar rose 1.3 percent against the Swiss franc to 1.1478 francs. The Australian and New Zealand dollars slid 3.3 percent and 4.3 percent respectively against the US currency.
"It is not going to be a gangbuster move but our view is that the US economy is the first that is going to solidify and then to recover," said Brian Belski, a US sector strategist at Merrill Lynch. "Dollar strength is here to stay." The dollar also rose 0.9 percent against its Canadian counterpart to C$1.2654 after the Bank of Canada cut rates by half a percentage point to a 50-year low of 1 percent.