Dollar gains on swine flu concerns

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Wednesday, April 29th, at 7 p.m. ET

NEW YORK (Reuters) -- The dollar and yen strengthened broadly Monday on rising risk aversion as concern grew that an outbreak of swine flu in Mexico could become a global pandemic, while the Mexican peso fell sharply.

Stocks slid worldwide as investors feared a flu pandemic could snap a nascent global economic recovery, sending the yen - which typically gains during heightened risk aversion - to a one-month high versus the dollar. The MSCI world equity index fell 0.7%.

The flight to safety dented currencies seen as higher risk such as the Australian and New Zealand dollars and pushed the Mexican peso down 3% against the U.S. dollar.

More than 100 people were confirmed to have died in Mexico from the swine flu virus, which has spread across North America and as far as New Zealand.

"Concerns Mexican swine flu could become pandemic after President Obama declared it a public health emergency helped drive the dollar and the yen higher, with the Mexican peso the hardest hit," said Meg Browne, currency strategist at Brown Brothers Harriman in New York

The euro fell against the dollar, erasing most gains chalked up Friday after the German Ifo survey showed business confidence improving more than expected, which had boosted hopes that the euro zone economy may be over the worst of the global financial crisis.

"The euro is already overextended on the downside and is likely to trade higher as the focus turns to other event risks this week: the FOMC meeting, the release of further bank earnings reports and the stress test," said Browne, referring to the U.S. Federal Reserve's monetary policy-setting Federal Open Market Committee.

In early New York trading, the dollar fell 0.5% against the yen to 96.68 yen, close to an earlier one-month low around 96.48 yen, while the euro lost 1.4% to 126.85 yen.

Against the dollar, the euro fell 1% to $1.3117 . The euro zone single currency had gained around 1.5% last week following a string of improved euro zone economic data.

The Mexican peso traded at around 13.7070 per dollar, after hitting a 3-week low, down around 3% on the day.

Heightened risk aversion on concerns that the flu may turn into a pandemic stung the higher-yielding Australian and New Zealand dollars, which were each down around 1.3% against the U.S. dollar.

The New Zealand currency was also under selling pressure because its central bank is expected to cut benchmark interest rates to a record low of 2.5% this week and signal no chance of a rise for a while.

Analysts noted, however, that the intense overall risk aversion may have been overdone and could fade, as long as there is no more news of the flu outbreak spreading.

"To some extent the reaction has been overdone," said Lauren Rosborough, senior currency strategist at Westpac Institutional Bank in London.

"Unless it comes out that this has become a pandemic, I would imagine the market will fade any rally in the dollar."

Aside from the flu concerns, analysts said market participants were looking ahead to the European Central Bank's monetary policy meeting on May 7.

The central bank is widely seen cutting its key interest rate to 1% from 1.25%, and investors are watching to see whether it will outline possible quantitative easing measures to help boost the recession-hit economy.

ECB Governing Council member Nout Wellink was quoted in the media as saying the bank should discuss lowering rates below 1%, while another member, Axel Weber, was quoted separately as saying that a cut to 1% was appropriate.

This week, U.S. first-quarter gross domestic product data on Wednesday will be closely eyed, while markets were also wary ahead of a two-day Fed policy meeting ending on the same day.

A small majority of economists polled by Reuters felt the Fed is likely to increase its Treasury purchase program from the current $300 billion.

News from a meeting of world finance leaders in Washington at the weekend was overshadowed by the swine flu concerns.

They agreed there was a "break in the clouds" of the economic storm but said more measures were needed to ensure an end to the global recession.