The dollar had its first weekly gain since Ben Bernanke, US Federal Reserve chairman, paved the way for further quantitative easing in late-August.
The dollar rallied as the latest gathering of G20 leaders in Seoul made little progress on defusing international currency tensions, merely agreeing that the findings of their previous meeting should be enacted.
Events outside the sphere of influence of those gathered in Seoul, however, prompted a return of risk aversion and investors booked some profits and parked their cash in dollar havens.
Having hit its lowest level of the year last week, the dollar rallied across the board. It climbed 1.2 per cent against the yen to Y82.15.
The euro was the worst-performing of the major currencies after a re-emergence of concerns over the state of eurozone sovereign debt markets. Ireland was the latest focus of debt restructuring fears, which drove out yields on Irish and Portuguese bonds to record wide levels over their German counterparts.
While rumours of an imminent Irish bail-out helped steady the euro on Friday, it was down 1.6 per cent over the week against the dollar to $1.3674.
Derek Halpenny, of Bank of Tokyo-Mitsubishi UFJ, said the escalating sovereign debt turmoil in Ireland and Portugal heightened concerns that contagion could drag other eurozone countries into trouble as well, delaying the European Central Bank’s attempts to normalise interest rates in the region.
“The crisis in the eurozone is set to get worse and yields will quickly reverse as ECB policymakers once again reverse course from a desire to implement exit strategies,” he said. “The euro remains vulnerable against many currencies as this scenario plays out.”
The euro was down 0.5 per cent over the week against the yen to Y112.31.
Emerging market and high-yielding currencies also lost out as investors shied away from risk.
Increasing speculation that China was set to ramp up its monetary tightening efforts following stronger-than-expected inflation data prompted fears of weakening demand.
“The possibility of a Chinese rate rise and Europe’s debt woes continue to have a fairly marked effect on currencies with the dollar and yen very much in favour as supposed safe havens,” said Michael Derks, of FxPro.
The Chinese data prompted the People’s Bank of China to raise the daily reference rate on the renminbi – the amount by which the currency is allowed to fluctuate against the dollar.
Some of China’s biggest banks were also ordered to increase their reserve requirements, paving the way, many analysts suggested, for further renminbi strength. The Chinese currency rose 0.7 per cent over the week to Rmb6.6290.
Sterling was mixed as investors were left uncertain about the Bank of England’s next move after its latest quarterly inflation report reinforced the divisions between the members of the monetary policy committee.
Analysts said it appeared that the “wait and see” faction would prevail.
Sterling was down 0.6 per cent to $1.6039 against the dollar but was 1 per cent higher at £0.8526 versus the euro and 0.5 per cent higher at Y131.65 to the yen.
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