Dollar falls to 2009 low

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NEW YORK (Reuters) -- The dollar on Monday slid to its lowest price this year against the euro and a basket of currencies as stronger-than-expected U.S. data and sharp gains in equities reduced safe-haven demand for the greenback.

The dollar, however, trimmed losses in afternoon trading as investors took profits in other currencies, but traders said this did not change the dollar's overall weak trend.

Commodity-linked currencies including the Australian and New Zealand dollars, considered to be higher risk, hit eight-month highs against their U.S. counterpart as oil prices jumped and U.S. stocks rose.

"The dollar is under pressure and equities are up because the market believes the U.S. economy is stabilizing and that we may have turned the corner," said John McCarthy, director of foreign exchange at ING Capital Markets in New York.

Data showing the U.S. manufacturing sector posting its highest reading since September and construction spending in April notching its biggest increase in eight months bolstered the view that the global economy was on the mend.

Various measures of tension in the financial markets have also eased, encouraging risk-taking in the market. The interest rates banks charge each other to borrow dollars dipped to a record low on Monday while euro rates also fell, as excess liquidity increased.

In late afternoon trading, the dollar index was flat at 79.231, after hitting its lowest since mid-December at 78.586 earlier in the global session.

The euro was also little changed on the day against the dollar at $1.4147, having rallied as high as around $1.4246, its strongest since late December, according to Reuters data.

Traders said price action in the afternoon suggests a top may be forming in the euro/dollar pair.

Among perceived higher risk currencies, the pound rose to a seven-month high against the dollar at $1.6478. The pound was last at $1.6428, up 1.5% on the day.

The Australian and New Zealand dollars hit eight-month highs of US$0.8154 and US$0.6565 respectively.

Also adding to optimism about the global economy and jump-starting a sell-off in the dollar were generally upbeat manufacturing reports from the euro zone, Britain and China.

The dollar rose against the yen, climbing 1.2% to 96.40 yen. The yen is seen as the least risky currency and falls against other units as risk tolerance rises.

Financial markets took in stride General Motors Corp.'s (GM, Fortune 500) bankruptcy filing on Monday, the third largest in U.S. history and the largest ever in the U.S. manufacturing sector.

Still, some analysts remained skeptical about the market's upbeat view and were baffled by the sharp sell-off in the dollar.

"I don't really buy all this green shoots story," said ING's McCarthy. "Unless we see the economy creating jobs and retail sales coming back, we're not out of the woods yet. So that's why I don't understand why the market is selling the dollar."

Analysts at CIBC World Markets think the dollar could see a temporary rebound given the speed at which investors ditched the currency. They believe investors could focus once again on the weak economies in Europe, for instance.

CIBC said the surge in the Canadian dollar versus the U.S. unit was overdone as increases in commodity prices have been modest. The Canadian dollar had risen 9.5% against the greenback in May and on Monday was up at C$1.0941.