The dollar climbed to nearly three-year highs on Monday as a slew of dire financial news led by insurer AIG's record loss exacerbated worries about the global credit crisis, boosting the greenback's safe-haven allure. Wall Street shares posted sharp losses, with the S&P 500 sliding to its lowest in more than 12 years, while the ICE Futures' dollar index, a measure of the dollar's value against six major currencies, hit its highest level since April 2006.
European Union leaders' rejection of a mass bailout for Eastern Europe pushed the euro below $1.26, while HSBC's 12.5 billion pound ($17.7 billion) rights issue, launched at a deep discount, also weighed on risk appetite and pushed European stocks lower.
But the biggest setback came from American International Group, which announced a $61.7 billion fourth-quarter loss, the largest quarterly loss in US corporate history. Earlier, the Treasury threw a new $30 billion lifeline to the company.
"This is just creating an overall environment, where if things get worse at AIG, we could see further write-downs and more problems in the financial sector," said Mark Frey, head of FX trading at global payments dealer Custom House in Victoria, British Columbia.
"This should mean a fresh round of dollar buying as we have seen today when we saw investors flock into US Treasuries," he added. Analysts said the news affirmed the view that the worst in the financial sector is far from over, spurring investors to sell stocks for safer, dollar-denominated alternatives such as US government debt and the money market.
In late New York trading, the euro was down 0.8 percent at $1.2570, after hitting a session low of $1.2545, the lowest in nearly two weeks, according to electronic platform EBS. Against the yen, the dollar fell 0.2 percent to 97.31 yen.
The euro was hit hard after EU leaders rejected calls, led by Hungary, for a 180 billion-euro aid package to rescue Eastern European countries suffering a deep recession. The EU agreed only to help countries on a case-by-case basis.
"It keeps alive the story that sovereign risk in Europe is marching higher as there's still no co-ordinated package" to address the problem, said Richard Franulovich, senior currency strategist at Westpac Banking Corp in New York. The dollar index rose 0.9 percent to 88.932. Earlier, it hit a roughly three-year peak at 88.969.
Sterling tumbled to $1.3959, its lowest since late January, according to Reuters data, before edging back to $1.4049, down 1.8 percent on the day. US economic data showing increases in personal spending and income for January and a higher-than-expected reading for a key US manufacturing gauge briefly eased the market's aversion to risk as the dollar trimmed gains.