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Dollar surges amid fresh market turbulence

business Updated: Feb 18, 2009 21:25 IST

The dollar rallied against the other main currencies on Tuesday as financial markets were roiled by fresh worries about the global economy and the euro hit by fears about deeper woes in Eastern Europe.

The euro was changing hands at 1.2585 dollars at 2200 GMT compared to 1.2801 dollars on Monday.

The yen meanwhile slid against the dollar as Japan's Finance Minister Shoichi Nakagawa announced he would resign after coming under strong criticism for appearing to be drunk at a Group of Seven nations' weekend meeting in Rome.

The dollar rose against the yen to 92.39 yen from 91.73.

The greenback resumed its role as a safe haven from turmoil as global stock markets fell heavily and oil prices tumbled.

International ratings agency Moody's earlier warned that western European banks may suffer downgrades because of problems in Central and Eastern Europe, sending down the euro as well as local currencies.

Jon Gencher at BMO Capital Markets said the turbulence prompted another rush into greenbacks.

"Once again the dollar is better bid on ongoing risk aversion, with the emerging European countries taking center stage," he said.

"Expectations are that the recession in emerging Europe will be more severe than elsewhere due to large imbalances, and will put financial strength ratings of local banks and their Western parents under pressure. As a result the euro is under some pressure against most the majors."

Barclays Capital analyst David Woo said banks from Austria, Italy, France, Belgium, Germany and Sweden account for 84 percent of western European bank loans in eastern Europe.

"This highlighted the ongoing issue of links between the eurozone and the Central and Eastern Europe economic slowdown," he added.

The Polish government meanwhile said it was ready to step in to support the zloty if one euro rose to more than five zlotys after the Polish currency hit its lowest level since Poland joined the European Union in 2004.

The Hungarian forint hit a record low against the euro and the Czech koruna sank to its lowest level in nearly four years. The Romanian leu also plunged in value.

Simon Derrick at Bank of New York Mellon said that "sentiment towards both Eastern and Western Europe (is) now demonstrably at its worst levels since the height of the first wave of the financial crisis back in October of last year."

The situation "reminds us that even though more developed countries have moved rapidly to address the preeminent problems facing their economies with bailouts and fiscal stimulus packages, the knock-on impact seems to be gaining momentum with export and external finance-dependent emerging economies," added Sacha Tihanyi at Scotia Capital.

In late New York trade, the dollar stood at 1.1694 Swiss francs from 1.1596 Monday.

The pound was at 1.4238 dollars from 1.4298.