Dollar mired in economic woes
The greenback gains on the euro and the British pound, but falls against the Japanese yen, as the U.S. economy is declared to be in a recession.
NEW YORK (CNNMoney.com) -- The dollar gained against the euro and the British pound Monday after a slew of dismal economic reports and official word that the U.S. economy has been in a recession since December 2007.
In times of uncertainty, investors flock to perceived safe havens like the U.S. dollar and U.S. Treasurys.
"The U.S. dollar is firming up because in a high level of risk aversion, U.S. Treasurys are the investment of choice rather than global equities," said Gareth Sylvester, senior currency strategist at HiFX in San Francisco.
The dollar gained against the 15-nation euro, which fell to $1.2646 from $1.2712 late Friday. The dollar also gained against the British pound, which slid to $1.4884 Monday from $1.5365.
"What we are seeing on a daily, weekly basis is the reallocation of wealth," said Sylvester. "If you are pessimistic on the global economy, then you are putting money in U.S. Treasurys." And Treasurys are bought in dollar denominations, giving the greenback further support.
Euro, U.K. economies droop: Several purchasing reports released Monday showed further economic sluggishness in the region.
As economies around the globe weaken, the possibility of further interest rate cuts by central banks around the world is heightening. The European Central Bank and the Bank of England are both set to announce their monetary policy decisions later in the week, and both banks are expected to slash rates.
"The euro and United Kingdom monetary authorities are catching up to the rate reductions that the Federal Reserve made earlier this year," said Tom Benfer, director of foreign exchange at BMO Capital Markets.
The Fed has been aggressively cutting rates, whereas overseas central banks have been "slow to react," said Benfer. "And now they are reacting very fast and suddenly."
Japanese yen: Meanwhile, the dollar lost ground against the Japanese yen, which bought ¥93.212 Monday, down from ¥95.482.
The yen had been gaining strength as investors shifted assets from high-yielding currencies such as the euro and the pound into what is perceived as a safer haven.
The yen was also getting a boost from the reversal of the carry trade, which is when investors borrow yen to fund investments in higher-yielding currencies. But when those currencies weaken, and investors reverse their positions, they are forced to buy back the yen, thereby raising its value.
Recession fears front and center. Several reports out Monday renewed investor fears about the severity of the slowdown of the U.S. economy, sending the Dow industrials down more than 400 points as investors quickly shifted money out of riskier equities.
Early Monday, the Institute for Supply Management, a purchasing management group, said its manufacturing index declined to its lowest level since May 1982, when the economy was mired in its last recession.
Adding to the downward pressure, the National Bureau of Economic Research made official what most investors and economists have been suspecting for months -- that the U.S. economy is in a recession. 
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