Dollar hits fresh four-year high

The US dollar surged to a fresh four-year high against the euro as worries that European banks could still face large loan losses next year added to concerns about the continent’s economic outlook.

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The dollar also climbed against the Canadian dollar after the Bank of Canada increased its key interest rate, the first Group of Seven nation to do so since the global financial crisis.

The euro sank to $1.2112 in early trading on Tuesday, its lowest point since it traded at $1.2029 in April 2006. It later pulled back up to 1.2253, below the $1.2305 it bought a day earlier.

Losses ‘to continue into 2011’

The European Central Bank said late on Monday that although it estimates that potential loan write-downs for the continent’s bank system will peak this year, “it is probable that loan losses will remain considerable in 2011 as well.”

The euro has dropped about 15 per cent against the dollar this year as traders take a dimmer view of Europe’s prospects and the strangling effect of deep government spending cuts.

Indebted European countries are cutting spending to get their budgets back in line with European Union mandates.

Markets were also jittery after a report from China showed manufacturing there slowed in May, underlining fears that Asian manufacturers and exporters remain vulnerable to waning of demand in Europe and elsewhere.

‘No currency unaffected’

“No currency seems unaffected by the rise of risk aversion,” Brown Brothers Harriman currency analysts wrote in a note to investors.

The dollar gave back some of its gains after reports on construction spending and manufacturing showed signs the US economic recovery is gaining strength. The dollar is a traditional safe haven for investors.

The British pound jumped to $1.4658 from $1.4545, while the dollar edged up to 91.24 Japanese yen from 91.07 yen.

The Bank of Canada increased its key interest rate by a quarter point, but said any further increases would depend on global economic conditions. The dollar rose to 1.0505 Canadian dollars from 1.0457 Canadian dollars.

Gold for current delivery closed at $1,224.80 per troy ounce on the New York Mercantile Exchange, up from $1,212.20 late on Friday.