The euro leapt to a historic high on Tuesday, surging to $1.6038 as investor concerns about the state of the US economy and its financial services sector grew.
The sky's the limit?
In morning London deals, the euro surpassed its previous all-time high of $1.6019, reached on April 22. It later stood at 1.6026, up from 1.5909 in New York late Monday. The surge comes as the foreign exchange market awaits Congressional testimony by Federal Reserve Chairman Ben Bernanke on the outlook for the US economy later Tuesday.
"We believe the dollar is in a very vulnerable position at present and a softening in rhetoric from Bernanke is likely to trigger a new wave of dollar selling," said economist Derek Halpenny at The Bank of Tokyo-Mitsubishi UFJ.
"Given the ongoing turmoil -- and let's not forget IndyMac, the third largest bank failure in US history -- the ability of Chairman Bernanke to 'talk up' the dollar will be very limited," Halpenny added.
The US rescued lenders Fannie Mae and Freddie Mac
"The trouble is the market is still very unclear over the details of support for Fannie Mae and Freddie Mac," said Halpenny, referring to a government bail out of the two banks as was announced over the weekend.
Concerns about more banks collapsing
Stock markets on Monday showed a temporary boost as a result of the dramatic US rescue plan for Fannie Mae and Freddie Mac, but analysts said the positive effect has since evaporated. Dealers said that skepticism about the rescue's effectiveness in ending the financial crisis caused world equity markets to plummet again Tuesday.
"Concerns in the US as to whether more banks are going to collapse has added to the market malaise which must have left policy makers in a sense of bewilderment given the short-lived bounce in sentiment," said Calyon analyst Mitul Kotecha.
European equities sank lower after Wall Street stocks had tumbled Monday in volatile trading on Monday and Asian markets sunk in Tuesday trading.