NEW YORK -- The dollar rose to a one-month high against a basket of major currencies Tuesday as growing signs that U.S. credit market turmoil is spreading overseas left investors seeking safety.
News that a Canadian trust could not find the funds to repay some short-term debt sent investors slashing their bets against the greenback, particularly after last week's news that French bank BNP Paribas had frozen some funds because of subprime concerns.
"Across global asset prices, it looks like there is some position unwinding going on and that is filtering through to FX where some of the biggest positions are long euro, long sterling and short dollar," said Sophia Drossos, currency strategist with Morgan Stanley in New York.
"That is a big driver of what is going on right now."
The dollar index, a gauge of the greenback against six major currencies, rose 0.4 percent to 81.354. It had fallen to a 15-year low of 79.957 last week.
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The euro was down 0.3 percent to $1.3573 after earlier touching a six-week low around $1.3564. The euro started to fall after reports that Spanish bank Santander is facing 2.2 billion euro exposure to high-risk U.S. loans.
Against the yen, the euro was down 0.5 percent at 160.15 while the dollar was down at 118.01 yen.
Sterling dipped below the $2.00 level after UK July inflation came in below the Bank of England's 2 percent target rate for the first time in over a year. It last traded at $1.9994 versus the dollar.
The Canadian dollar extended declines and was almost 1 percent lower at C$1.0638 per U.S. dollar after two Canadian trusts said Tuesday that they were unable to place asset-backed deals.
On Monday, niche investment bank Coventree Inc. said the credit problems caused by losses in the U.S. subprime mortgage sector had left it unable to replace maturing debt.
"We got a bit of news out that there might be more trouble up here in the asset-backed subprime sector," said Shaun Osborne, chief currency strategist at TD Securities in Toronto. "There might be enough momentum here for real money to take profits on long Canadian dollar positions."
While global economic growth for now is on pace for roughly 5 percent, signs of slower growth surfaced overnight. The euro faced pressure as expectations of a rate hike in the euro zone were offset by weaker-than-expected growth data and further European Central Bank action to calm short-dated money markets.
That contrasted somewhat with U.S. data showing the U.S. trade balance unexpectedly narrowed in June, while July producer prices rose more than expected.
"We have a change in perception about Europe, with investors now realizing the region is not immune to the credit crunch coming from the U.S., and that is putting a lot of pressure on the euro," said Matthew Strauss, a senior currency strategist at at RBC Capital in Toronto. "At the same time, U.S. markets seen to be stabilizing and the data today was not negative, which gives the dollar a bit of support."
Federal Reserve officials have said inflation remains their main concern and analysts said signs of accelerating inflation would prevent the central bank from cutting interest rates.
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