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Dollar rockets higher, euro plumbs new lows

NEW YORK: The dollar hurtled higher against all other major currencies in unusually volatile trade on Friday, hitting record peaks against Europe's embattled currency and touching 3-1/2 month highs against the yen.

To the surprise of many in the market, the dollar also launched a dizzying rally against the Japanese yen -- hitting 107.26 yen, a gain of two full yen from the previous close.

The Australian and New Zealand dollars plunged to their lowest in months, and Canada's unit fell to a one-week low during the panicky rush into the dollar, which accompanied steep declines in U.S. stocks and a stunning rally in bonds.

"You're seeing the dollar performing in a rare way," said Craig Larimer, market strategist at BancOne. "There's a very uniform pattern against all currencies, including commodity currencies (Australia, New Zealand, Canada) and industrialised currencies."

The euro, hurt by scepticism about Europe's economic outlook and lack of public support from European officials, sank to a record low of 97.36 cents, down 1-1/2 cents on the day and well below the psychologically key $1.00 level pierced a day before.

Traders said the dollar's overnight gains against the euro were accelerated by surprisingly strong U.S. economic data, fuelling speculation the Federal Reserve will hike rates aggressively to slow growth and rein in inflationary pressures. The data triggered sharp losses in Wall Street stocks, but U.S. Treasuries gained strongly.

"These numbers are bound to help the dollar," Sanwa Bank senior trader Jeffrey Yu said.

Other European currencies tumbled in the euro's wake. The Swiss franc fell to 10-year lows and the British pound fell to its weakest level against the greenback in nearly a month.

Nevertheless, traders and analysts struggled to explain the sharpness of the dollar's broad rise.

"Traders were scratching their heads as to why all of a sudden everyone was bailing out of everything against the dollar," said Mark Thome, vice president at Fortis.

Economic fundamentals have simply not changed enough to warrant such exaggerated moves in the foreign exchange market, said Lara Rhame, U.S. economist for foreign exchange, Brown Brothers Harriman.

"Clearly the euro's decline below parity, which a major psychological level for the market, has brought people into new territory, and it seems to be falling almost out of control," Rhame said.

Combined with recent less-than-rosy stock market returns, the euro's sell-off may have spurred a chain reaction to buy the dollar and safe-haven U.S. bonds, Rhame added.

Wall Street stocks were battered, with the Dow Jones industrial average closing down more than 2.5 percent after the U.S. data showed the economy grew at a surprisingly strong 5.8 percent annual rate during the last quarter of 1999.

The employment cost index, reportedly a favoured indicator of Fed Chairman Alan Greenspan, jumped 1.1 percent in the same period, all but ensuring the Fed will raise rates next week.

U.S. Treasuries benefited from the slump in equities and the benchmark 30-year bond was up one point in late trade.

But improving data in the euro zone, including a drop in French unemployment in December to 10.6 percent on Friday, were not enough to lure investors away from the relative attractions of America's red-hot economy.

The euro's steep decline brought the currency to more than 16 percent below the level at which it was launched with champagne celebrations in January 1999. Traders said there was no reason to believe it would not fall toward 95 cents.

Market watchers looking for signs of official concern about the euro were disappointed after European Central Bank Vice President Christian Noyer declined to comment on the currency at the World Economic Forum's annual meeting, while France's Finance Minister Christian Sautter said merely that the euro will become stronger sooner rather than later.

By contrast to the euro's chronic weakness, the yen has been persistently strong against the dollar as investors bet on signs of growth in Japan's economy and buoyant Tokyo stocks.

In fact Japan's central bank has intervened repeatedly to tame yen strength in recent months, fearing a too-strong yen will hurt economic recovery. But traders ruled out central bank intervention as a possible factor in the yen's drop, citing technical factors and broad dollar strength.-Reuters