The dollar rose to a one-and-a-half-year high against the euro on Tuesday and posted strong gains elsewhere as funding demand supported the US currency.

Analysts said hedge funds were liquidating long positions in riskier assets that are funded by selling the US dollar, and returning to cash in anticipation of massive investor withdrawals.

The dollar also received support after Ben Bernanke, chairman of the Federal Reserve, said an additional US fiscal stimulus package should be considered to help improve access to credit for consumers, homebuyers and businesses.

The foreign exchange market ignored the potential cost and the rise in the US fiscal deficit implied by the suggestion.

Instead, the dollar was rewarded as investors focused on the active stance of the US authorities in trying to get to grip with the current turmoil in financial markets.

“With the prospects for growth globally still bleak, the appetite for deleveraging will persist while the dollar should derive support from the monetary and fiscal stance of the US that suggests the US will emerge from this downturn first,” said Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ.

By midday in New York, the dollar rose 1.1 per cent to $1.3179 against the euro, climbed 1.2 per cent to $1.6950 against the pound and gained 0.4 per cent to SFr1.1552 against the Swiss franc.

Meanwhile, the dollar surged 1.5 per cent to a three-year high of C$1.2102 against the Canadian dollar after the Bank of Canada cut interest rates by 25 basis points to 2.25 per cent.

Although the cut was less than the 50bp expected, the central bank said it would have to ease monetary policy further to combat the effects of the global financial crisis.

However, the dollar fell 1.1 per cent to Y100.98 against the yen as falling equities heightened risk aversion and pushed investors towards the haven of the low-yielding Japanese currency.

The yen also rose 2.2 per cent to Y133.12 against the euro, climbed 2.2 per cent to Y171.30 against the pound and jumped 3.1 per cent to Y69.56 against the Australian dollar.

The Aussie dollar also dropped 2 per cent to $0.6889 against the US dollar as the minutes of the Reserve Bank of Australia’s October meeting – when it stunned the market with a 100bp interest rate cut, opening the way for further monetary easing – were published.

Elsewhere, emerging market currencies took a hit as foreign investors, particularly those based in the US, continued to repatriate funds.

Against the dollar, the South African rand lost 4.6 per cent to R10.5450, the Turkish lira fell 4.5 per cent to TL1.5745 while the Brazilian real dropped 4.2 per cent to R$2.1985.

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