Dollar strengthens on global stock weakness

Risk appetite dwindles as Asian, European markets tumble and investors worry about the pace of recovery.

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NEW YORK (Reuters) -- The euro hit a two-week low against the dollar and neared a one-month low against the yen Monday as world stock markets fell and doubts about a U.S. recovery prompted investors to cut exposure to risk.

The yen rallied across the board as investors bought it as a safe haven, while a slide in oil prices hit currencies such as the Australian dollar, which retreated from recent 10-month highs against the greenback.

A multimonth equity rally started to sputter late last week after data showed U.S. consumer sentiment declined for a second straight month. Stocks in Asia responded Monday by falling more than 3% and the sell-off continued in Europe and on Wall Street.

Data showing Japan's economy grew between April and June for the first time in five quarters was largely ignored, and a surge in New York state factory activity had only a modest effect.

"People have started to feel that the market rally moved well ahead of the actual economic improvement," said Vassili Serebriakov, currency strategist at Wells Fargo in New York.

"The rebound in the S&P has been its fastest in the post-war (period), and so people are getting nervous that things have come too far, too fast," said Rob Minikin, senior currency strategist at Standard Chartered in London.

In late afternoon trading in New York, the euro was down about 0.9% at $1.4079, just above a two-week low. It was down 1.5% at ¥132.8 after hitting its lowest level since July 22. The dollar fell 0.5% to ¥94.45.

A pullback in risk appetite in the near term should favor the dollar, Brian Kim, a currency analyst at UBS AG said in a note.

The pound hit a one-month low earlier and was last down 1.2% at $1.6337 while the Australian and New Zealand dollars each fell sharply against the greenback.

European shares and U.S. stock indexes fell about 2% or more on the day, while oil prices tumbled to a two-week low.

Some analysts also said coupon payments on Treasurys worth $20 billion to $25 billion on Monday were helping to push the dollar down against the yen.

Japan's GDP, Treasury flows data

Data showing Japan's economy pulled out of recession in the April-June period did little to improve sentiment, and analysts said yen strength had more to do with safe-haven purchases by investors eager to dump stocks and higher-yield currencies.

While Japanese government stimulus spending helped the economy expand 0.9% in the quarter, ending its longest recession in decades, analysts said the road to sustainable recovery would be long.

U.S. government data showed China cut Treasury holdings in June by the biggest percentage in nearly nine years, though net inflows into long-term U.S. securities rose to $90.7 billion.

China, the biggest Treasury holder, sold mostly short-term bills in June. If it continues, that could be a "significant drag on the dollar," said Alan Ruskin, chief international strategist at RBS Securities in Greenwich, Conn.

But "it is clear that some of this money will simply stay in dollars and extend out the curve at the right yield," Ruskin added. To top of page

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