The dollar recovered strongly from early sharp losses yesterday, hitting a one-year high against a basket of currencies.
The violent price swing came as investors digested news that the US government had bailed out mortgage guarantors Freddie Mac and Fannie Mae.
The dollar sold off to a low of $1.4428 against the euro and $1.7975 against the pound in Asia trade as worries about US public finances weighed on the greenback.
But the dollar staged a dramatic turnround as European markets opened.
Analysts said the rescue plan did little to change the backdrop for the dollar’s recent surge higher, with economies outside the US still expected to slow markedly and oil prices to head lower.
Simon Derrick of Bank of New York Mellon said that given the pre-emptive action of the US authorities, the outlook for the US economy was arguably more positive than for other regions.
With the pace of the sell-off in the euro and the pound against the dollar, he said, many investors were waiting for a bounce in those currencies to cut long positions against the dollar.
“This has given them a chance to buy the dollar at better levels,” said Mr Derrick. “The underlying trend towards dollar strength remains in place.”
Late in New York, the dollar had recouped its losses to stand up 1.4 per cent at $1.4137 against the euro, up 1.1 per cent at $1.7570 against the pound and 0.9 per cent higher at $1.1300 against the Swiss franc.
The dollar index, which tracks its value against a basket of six leading currencies, rose to 79.84, its strongest level since September 2007. Meanwhile, the dollar rose 0.3 per cent to $108.06 against the yen as risky assets rallied.
The yen soared late last week as carry trade investors liquidated bets on riskier, higher-yielding assets funded by selling the low-yielding Japanese currency. This move went into reverse yesterday, sending the yen lower across the board.
Lee Hardman, of Bank of Tokyo-Mitsubishi UFJ, said that while the US government’s plan was likely to lead to a near-term bounce in risky assets, the initial wave of optimism would fade as concerns over slowing global growth increased expectations of monetary easing in the leading economies through 2009.
“Any near-term yen weakness should be treated as an opportunity to buy it at more attractive levels,” he said.
The yen lost 2 per cent to Y152.80 against the euro and dropped 1.8 per cent to Y189.87 against the pound.
But rising risk appetite boosted other Asian currencies, which were hit hard last week amid talk of investors pulling funds out of the region. The South Korean won posted its biggest daily increase in a decade, jumping 3.3 per cent against the dollar to Won1,080.30.
