Paulson lifts dollar from lows

The dollar rallied from close to a record low against the euro on Tuesday after Hank Paulson, US Treasury Secretary, moved to calm fears over the health of the US financial system.

The dollar lost ground earlier in the session after results from Wachovia, the fourth largest US bank, failed to meet market forecasts.

However, the greenback recovered after Mr Paulson predicted US lawmakers would pass a bill this week to shore up Fannie Mae and Freddie Mac, the state-sponsored mortgage providers.

Comments from Charles Plosser, president of the Philadelphia Fed, gave the dollar an additional boost as he argued the central bank should raise US interest rates “sooner rather than later” to combat inflation.

Marc Chandler at Brown Brothers Harriman said the comments from US officials, combined with a sharp drop in oil prices, had forced dollar bears quickly to buy back short positions in the currency.

He said: “Short-term traders have been caught wrong-footed and stop-losses have been triggered”.

Late in New York, the dollar had risen 0.9 per cent to $1.5775 against the euro, gained 0.6 per cent to $1.9903 against the pound and climbed 0.8 per cent to Y107.33 and 1.4 per cent to SFr1.0315 against the yen and the Swiss franc, respectively.

The Canadian dollar eased 0.8 per cent to C$1.0088 against its US counterpart after figures showed Canadian retail sales rose by less than expected in May.

The South Korean won rallied amid talk that the country’s monetary authorities had again intervened in the market to defend the currency.

The move came as Kang Man-soo, South Korea’s finance minister, said the country’s economy was in as much trouble as it had been during the Asian financial crisis of 1998/9.

He said: “Excluding exports, the environment including investment, consumption, job growth and current account is showing trends as serious as during the financial crisis”.

Standard Chartered raised its rating on the won to “neutral” from “underweight”, however.

Analyst Callum Henderson said: “South Korean authorities appear to be taking a more determined stand against inflation, using a more stable currency for that purpose and ensuring it through heavy market intervention”.

The won rose 0.8 per cent to Won1,017.00 against the dollar.

Elsewhere, the Serbian dinar rose 1.1 per cent to a seven-month high of ND77.86 against the euro after the Serbian authorities arrested Radovan Karadzic, the former Bosnian Serb president.

Analysts said the development was likely to prompt closer economic ties between Serbia and the EU, and could ultimately be seen as a first step in the country’s path towards membership of the union.