The dollar jumped to its highest in five months versus the euro on Wednesday as reports that China is reining in lending led investors to shun risky assets and worries about Greece's budget problems kept pressure on the shared currency.
The greenback extended gains as U.S. equities were down and data showed benign wholesale inflation and a rise in housing permits.
The dollar index (DXY) jumped 1% to 78.354, the highest since September and up from 77.451 in late North American trading Tuesday. The index tracks the dollar against a trade-weighted basket of six major rivals.
The euro fell to $1.4110 from $1.4301 late Tuesday, hitting its lowest level since mid-August.
Analysts focused on media reports saying the China Banking Regulatory Commission asked several commercial banks to stop issuing new loans in the rest of January. That would add to efforts to rein in bank lending, which nearly doubled in the past year.
"To the extent that the news of China's tightening is a negative for global growth and equities, it is a positive for the safe-haven currencies such the U.S. dollar and Japanese yen," said strategists at Barclays Capital.
The sell-off in Chinese stocks benefited lower-yielding currencies, such as the dollar and yen, which tend to rise whenever investors are more risk averse and seek assets that are perceived to be safer.
The dollar traded at 91.24 yen, reversing a loss to gain 0.1% versus the Japanese currency.
Major U.S. stock indexes declined about 1.6% after earnings data from big banks. Most Asian markets ended lower, followed by European shares.
The dollar held onto strong gains versus the euro and other major currencies after a pair of U.S. reports showed housing starts improved and core wholesale prices remained benign last month.
Analysts also noted that Republican Scott Brown's win in Tuesday's special Senate election in Massachusetts spells trouble for the Democrats' supermajority and could pave the way toward more compromises and spending cutbacks.
"In an environment where balance-sheet repair is the focus, such a development would be U.S.-dollar-positive," said strategists at RBC Capital Markets.
Pressure on the euro was also tied to continuing worries about Greece's budget woes and the potential for other sovereign-debt problems in the 16-nation euro zone, analysts said.
Euro sentiment "remains negative and if [economic] data does not offer a glimmer of hope sometime soon, the markets may want to take a run at the psychologically important 1.4000 level in the near future," said Boris Schlossberg, director of currency research at GFT, in emailed comments.
Strategists at KBC Bank in Brussels said the break below $1.4218 triggered sell stops, which accelerated the euro's fall.
"The strong downward momentum with the key $1.4218 level so close simply was too obvious (an) opportunity for momentum traders to try some additional stop-tripping," they wrote. "Once again, the Chinese measures were at best a good excuse."
British, Australian impact
The British pound fell to $1.6272 versus the dollar from $1.6369. The euro, meanwhile, dropped 0.7% versus the pound, touching a four-month low.
Sterling had been buoyed by a larger-than-expected drop in December U.K. jobless-benefit claimants but headed broadly lower after the minutes of the Bank of England's January policy meeting were released.
Strategists at BNP Paribas said the Chinese banking data also added to pressure on the Australian dollar, which fell 1.8% versus the U.S. unit to trade at 90.81 U.S. cents. The Australian economy is highly sensitive to Chinese demand for commodities.
The strategists said they continued to view the Aussie as a "relative outperformer," however, and argued that rising consumer confidence has reinforced prospects for a rate increase in early February, which would be supportive for the currency.
Copyright 2009 Dow Jones Newswires
CURRENCIES: Dollar Holds Gains After U.S. Data As Euro Falls3Q income up for Dollar General
