The Dollar rose against the Euro and surged to a three-month peak against Sterling on Wednesday amid signs that financial market turmoil was starting to threaten economic growth beyond US borders.
The Euro was hit after an index of German business sentiment came in close to a one-year low, prompting investors to increase year-end Dollar buying.
Large institutional investors also helped pushed Sterling below the 2.0000 for the first time since September, with traders pricing in another interest rate cut after minutes from the Bank of England's last meeting this month showed unanimous support for a cut to 5.5%.
Volumes were typically light ahead of year-end and Forex traders said that exaggerated some of the price action. EurUsd was 0.25% weaker at 1.4382 having felt earlier as low as 1.4325. GbpUsd hit a three-month low at 1.9928 before recovering to 1.9961, still down 1.02% from Tuesday. UsdJpy last traded at 113.30, unchanged on the day, after dipping down to 112.74.
Dollar buyers were also cheered by Morgan Stanley's announcement of a $5 billion investment from China, which drew attention away from write downs that caused the bank to post a net loss of $3.59 billion in the fourth quarter.
The trading ranks are likely to think out further as the week goes on, but those who remain at their desks will get weekly jobless claims and the Philadelphia Fed's manufacturing index to scour for clues about US economic health.
The weak business confidence reading in Germany came at a time when inflationary pressures were rising in the euro zone, suggesting that the European Central Bank may have a tough time raising rates any time soon, analyst said. Such a situation could help the Dollar regain further lost ground against the Euro, with analysts less optimistic that the Fed would aggressively cut interest rates next year after inflation data last week pointed to hidden price pressures. The Bank of Canada and Bank of England, by contrast, have cut rates this year and could cut again in early 2008.