The dollar surged across the board on Friday, hitting a five-month high against the euro and a 17-month peak against the pound as the European Central Bank’s caution on the growth outlook reinforced worries of a faltering global economy.

The dollar index vaulted to its highest in more than five months, with investors and analysts saying the U.S. currency is staging a broad rebound from record lows struck earlier in the year as the global slowdown takes a toll on other major currencies.

As investors rushed back to the greenback to cover short positions, the Australian dollar also shed about 1 percent and the New Zealand dollar lost 2 percent.

“We are seeing a shift away from a focus on the U.S. to a more global problem,” said Sharada Selvanathan, a currency strategist at BNP Paribas in Hong Kong. “The dollar is getting a boost by default.”

The ECB left rates unchanged at 4.25 percent as expected on Thursday, and while Trichet insisted inflation was still its main concern, analysts said he had little choice but to do so after a rate hike the previous month. [ID:nL7650401]

Instead, investors read Trichet’s comments that growth had slowed more than expected as a sign that the central bank is less likely to hike rates and may eventually shift towards an easing bias on policy.

The euro shed 0.7 percent from late New York trade to $1.5208 <EUR=>.

The single currency dropped as far as $1.5195 on trading platform EBS, a five-month low, with heavy selling spurred in usually placid Asia trade after it fell through key chart support near $1.5280 that had served as a base of support for the past few months.

Traders cited heavy dollar buying by model funds, hedge funds and other speculators as they rushed to unwind bets on a deeper drop.

“The market’s theme is shifting toward economic conditions in each respective economy. It’s no longer just about the dollar,” said a trader at a European bank.

The euro fell against the yen, dropping 0.5 percent to 166.75 yen <EURJPY=R>.

The dollar edged up 0.2 percent versus the yen to 109.61 yen <JPY=>, holding near a seven-month high struck this week. But traders said a climb above 110 yen may be difficult in the near term.

The dollar index, a gauge of its performance against a basket of major currencies, jumped 0.7 percent to 75.065 <.DXY>, a 5- month high. Sterling slid 0.8 percent to a 17-month low of $1.9270 <GBP=D4>.

On Wednesday the dollar index broke above its 200-day moving average for the first time since April 2006, a move analysts said could herald a medium-term turnaround in the greenback, which has been battered by the U.S. housing crisis and financial sector turmoil.

The dollar repeated the feat against the euro on Friday as the single currency broke below the 200-day moving average for the first time since April 2006.

“Market participants find it easier to probe the downside when such milestones are breached,” said Takahide Nagasaki, chief forex strategist at Daiwa Securities SMBC.

Though prospects for the United States are far from bright — Wall Street tumbled on Thursday as a big loss at insurer AIG Group fanned fears of more credit crisis fall out — the currency market is just beginning to digest the possibility that other economies are headed for tough times as well, Nagasaki said.

The slide in higher-yielding currencies deepened as investors rushed for the exits.

The Australian dollar has been particularly hard hit as market players had pushed it to a 25-year peak vs the greenback three weeks ago on the surge in metals, which it exports, and as the economy had seemed to hold up better than others.

But as the economic outlook deteriorated and the Reserve Bank of Australian opened the door to cutting rates this week, investors like macro funds started to bail out of the Aussie.

The Australian dollar was down 1.1 percent at $0.8964 <AUD=D4> after hitting a six-month low of $0.8925. In the past two weeks, the Aussie has fallen nearly 7 percent.

The New Zealand dollar <NZD=D4> plunged more than 2 percent to an 11-month trough of $0.6983 on the Reuters dealing system.

Source: http://www.afxnews.com

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