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Dollar strengthens as Europe's debt woes worsen

November 10, 2010 | 11:06 am

The beaten-down dollar suddenly is attracting global investors again, as government-debt worries deepen in Europe and U.S. economic data look more upbeat.

For the moment, the dollar’s traditional role as a haven is trumping concerns about the Federal Reserve’s plans to flood the financial system with $600 billion in fresh cash over the next eight months.

The DXY index of the dollar’s value against six other major currencies is rallying for a fourth straight session. The index was up 0.3% to 77.68 at about 11 a.m. PST. It has gained 2.4% since Thursday.

The euro fell as low as $1.367 early Wednesday, down from $1.383 on Tuesday and $1.42 a week ago, as yields on Irish government bonds continued to skyrocket on fears that Ireland’s budget crisis will force a bailout by the European Union.

The Associated Press reported:

Bond traders increasingly believe that Ireland soon will be forced to tap Europe's emergency fund for euro-zone nations facing a threat of bankruptcy. The 16 nations of the euro zone created that 750-billion-euro backstop in May as the EU and International Monetary Fund provided an emergency 110-billion-euro loan to Greece.

The cost of funding Irish debt has risen steadily since September, when the government admitted its bailout of five banks would cost at least 45 billion euros, equivalent to 10,000 euros for every man, woman and child in Ireland. That gargantuan bill, in turn, has made the projected 2010 deficit rise to 32% of GDP, the highest in post-war Europe.

The yield on 10-year Irish bonds soared to 8.64% Wednesday from 7.94% on Tuesday and 6.77% two weeks ago.

By contrast, 10-year U.S. Treasury notes yield 2.72%.

In a replay of the confidence crisis that Europe suffered in spring -- that one triggered largely by Greece’s debt nightmare -- Ireland’s woes also are driving up government borrowing costs in other European countries severely weakened by the global recession of 2008-09.

Portuguese 10-year bond yields jumped to 7.04% on Wednesday from 6.76% on Tuesday and above the spring peak of 6.28%. Spanish 10-year bond yields surged to 4.50% from 4.39% Tuesday.

-- Tom Petruno