Dollar rallies as stocks slump

Investors seek shelter in U.S. currency as concerns about automakers and banks weigh on the stock market.

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By Ben Rooney, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- The dollar rose against the euro and the pound Monday morning but fell versus the yen as global stocks dropped in response to renewed concerns about the U.S. automotive industry and banks.

The Obama administration said over the weekend that General Motors and Chrysler LLC have not made sufficient progress in their efforts to become economically viable. The government will continue to keep the companies afloat with additional funds but warned that a "structured bankruptcy" is an option still on the table.

Treasury Secretary Tim Geithner said Sunday that the nation's largest banks could still need "large amounts of assistance" before the financial system can be stabilized. He also said the government has about $135 billion left for bank bailouts.

"The blame for today's selloff looks to be a sentiment shift towards the auto sector and financials, which are leading the way lower," said Sacha Tihanyi, currency strategist at Scotia Capital in Toronto, in a research report.

On Wall Street, stocks were down about 4% in afternoon trade. Asian and European markets also fell sharply.

The retreat comes after major U.S. stock indexes advanced for three consecutive weeks, gaining more than 20%, amid faint sings of an economic recovery. But the rally faded Friday and selling gained momentum Monday as investors responded to the automaker situation.

The dollar and the yen, which are considered safe havens, often gain ground when stock prices fall as investors shy away from more risky assets.

The dollar was up 0.5% against the euro to $1.3161. It gained 0.45% versus the pound to trade at $1.4195. Against the yen, the dollar sank 0.9% to ¥97.11.

The euro was also under pressure ahead of Thursday's interest rate announcement from the European Central Bank. Most analysts expect the central bank to lower interest rates by half a percentage point to a record low of 1%.

In addition to cutting interest rates, the ECB could announce plans to take unconventional steps such as purchasing corporate bonds, Tihanyi said.

The euro rose to $1.37, near the top of its recent trading range, earlier in March after the Federal Reserve announced plans to purchase longer-term U.S. bonds.

Meanwhile, the leaders of the world's 20 largest economic powers, known as the Group of 20, will gather this week in London to discuss ways to overcome the global financial crisis.

While the market will monitor the meeting for comments on China's recent support for an alternative reserve currency, Tihianyi doesn't expect U.S. officials to make any formal statement on the issue.

China's central bank chief called last week for an expanded role for the International Monetary Fund's Special Drawing Right (SDR) as an alternative to the dollar as the world's primary reserve currency.

The SDR is an international reserve asset based on the value of a basket of currencies, including the euro, Japanese yen, pound sterling and U.S. dollar. It was created to help governments manage exchange rates.

Expanding the role of the SDR would limit the influence of any one country's fiscal and monetary policies on the global economy, said People's Bank of China governor Zhou Xiaochuan. To top of page

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