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Buoyant dollar climbs to fresh record vs euro

NEW YORK: The resurgent dollar closed at record highs against Europe's single currency for the third consecutive session on Monday as investors bet the red-hot US economy will continue to outperform its global partners.

The dollar's muscle was also reflected in gains against other currencies as it rose to a 3-1/2 month high against the Japanese yen, its highest level against the British pound in 2000 and to a fresh 10-year high against the Swiss franc.

"In the short-term, there is a strong dollar story emerging," said David Gilmore, partner at Foreign Exchange Analytics.

In thin, jittery trade, the dollar raced to a lifetime high against the beleaguered European currency of 96.75 cents by midday and kept the euro pinned near the 97 cent level for the remainder of the session.

After rallying at the start of the year as analysts forecast a stronger euro as the region's economy shifted into a higher gear, the euro has slid nearly 4 percent against the dollar in the first four weeks of the year.

Against the yen, the dollar pressed to a high of 107.51 and remained firm all day.

The dollar's latest sprint higher extended a rally that began late last week, when economic data showing signs of emerging inflation sent US stocks tumbling but boosted US Treasury bonds ahead of a Federal Reserve interest rate decision this week.

"I hold to the belief that the euro should be firmer and will be firmer, but we really have to work through this negative psychology," Gilmore said.

Technical analysts said the euro's next downside target was near 95.50 cents, a level which corresponds to a fresh 10-year high in dollar/mark terms of 2.0480.

A rebound in major US stock indexes on Monday underpinned the dollar's gains.

Jim McCormick, currency strategist at J.P. Morgan in New York, said the dollar was being lifted as traders continued to bail out of long euro positions and sought the safety of US assets.

"It's not surprising that we are seeing some dollar strength because we are seeing some position squaring and flight to quality in the US bond markets," McCormick said.

But he cautioned that inflationary pressures, uncertainty over the US interest-rate environment and volatile swings in US stock markets "is by no means a dollar positive story."

Analysts said the dollar also benefited from expectations of higher US interest rates vis-a-vis Europe -- the Federal Reserve is widely expected to hike short-term rates by 25 basis points this week, while the European Central Bank is seen on hold.

Analysts say the year-old European currency, which has declined some 16 percent since its debut one year ago, has also remained under pressure from a perceived lack of support from European officials.

Even though Wim Duisenberg, President of the European Central Bank, on Monday said a further fall of the euro could pose inflationary risks, this failed to erase a perception that policy makers remain indifferent to the euro's plight.

Gilmore of Foreign Exchange Analytics said the euro should test downward, unless a surprise Fed rate hike of 50 basis points send US stocks reeling.

In a Reuters survey taken last Friday, all 30 US primary dealers forecast a 25-basis point rise in rates at the Fed's policy-setting meeting this week.

A Reuters poll of European economists completed on Monday showed that 36 out of 41 anticipated an ECB rate hike within the next two months, but only 11 were braced for a move at the ECB's council meeting on Thursday.-Reuters