The dollar rallied yesterday, pulling away from a record low against the euro amid concerns that problems in the US subprime mortgage and credit markets could spread to other economies.
The dollar, which fell to a record low of $1.3852 against the euro on Tuesday, rose 0.9 per cent to $1.3710 by midday in New York, its largest one-day gain against the single currency in almost five months.
Market experts suggested the rebound was driven largely by technical factors.
The US currency also climbed 0.6 per cent to $2.0500 against the pound and 0.2 per cent against the yen.
Some signs that concerns about the US subprime and credit markets were spilling over to other markets were evident yesterday.
"Sharp falls on Asian equity markets have seen people reassess their risk exposure and cut back carry trades," said Hans Redeker at BNP Paribas.
He said it was the trimming back of carry trades, in which the low-yielding yen is sold to fund the purchase of riskier, high-yielding assets, that was helping the dollar.
"Investors have sold the euro and sterling against the yen, which in turn has pushed the dollar higher against both currencies," he said.
Although figures yesterday revealed weaker-than-expected US existing homes sales in June, Greg Gibbs at ABN Amro said that concerns about knock-on effects and a global slowdown beyond the US were exaggerated.
"At this point, we continue to believe that the issue is overdone and believe the market is overreacting," he said.
"As such, we view these levels as good opportunities to re-establish short-dollar positions."
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