The dollar climbed to a ten-month high against the euro Wednesday amid mounting concerns that the International Monetary Fund will play a pivotal role in any bailout of Greece.
The news that Portugal's debt has been downgraded by one of the world's leading credit rating agencies also fueled investor concerns about the government debt woes afflicting Europe and its shared currency.
The 16-nation euro slid to $1.3338 in late New York trading from $1.3488 late Tuesday. That's just above its low of $1.3329 earlier in the day, which was its lowest level since May last year.
Meanwhile, the British pound dropped to $1.4893 from $1.5032 after the British government said financial markets are still fragile and the country's economic recovery is still in its infancy.
The dollar jumped to 92.10 Japanese yen from 90.43 yen, and rose against most emerging-market currencies in Latin America and Asia, as well as the New Zealand, Australian and Canadian dollars.
The dollar jumped 1.2 percent against the ICE Futures US dollar index, which measures the dollar against the euro and five other currencies.
Fears that the Greek debt crisis will spread have been the main focus of attention in the markets after Fitch Ratings downgraded its view on Portugal's debt amid growing concerns about the government's ability to service its borrowings.
There are also concerns that the Washington-DC based IMF will play a substantial role in helping Greece get a grip on its public finances, underlining the difficulty of European governments to deal with the Greek debt crisis on their own.
For weeks, it seemed that the countries that use the euro were adamant that they would not look for outside help in addressing Greece's debt crisis. But the German government's increasing reluctance to bail out Greece amid domestic opposition has increased the likelihood that the IMF would be called in.
"The euro area has lost some credibility on that front and the communication cacophony around the whole negotiation process contributed to it," said Jacques Cailloux, an analyst at Royal Bank of Scotland.
Thursday will likely be the next key date in the Greek debt crisis as the 16 leaders of euro countries are expected to meet in Brussels.
At the moment, the spread between Greek and German 10-year bond yields stands at over 3 percentage points, meaning that Greece has to pay interest in excess of 6 percent just to get investors to lend it the cash.
That's not sustainable in the long run. Although the Greek government has said it can wait until the end of April to borrow more money, its economic situation is dire. The Bank of Greece estimates the economy will contract by 2 percent this year, more than previously expected.
Also Wednesday, the U.S. government said orders for durable goods rose for a third straight month, raising hopes that continued strength in manufacturing will help sustain the economic recovery.
"That news certainly supports further dollar strength, as markets are focusing not only on Europe's problems but on improving sentiment regarding the U.S. outlook," said Michael Woolfolk, senior currency strategist at Bank of New York Mellon Corp.
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