he ICE futures exchange's U.S. Dollar Index, which tracks the greenback against six trading partners, rose last week the most in more than four decades as the dollar soared to a two- year high versus the euro and reached its strongest in six years against the U.K. pound. A global grab for dollars has pushed the index up 22 percent since July 15 to the highest since April 2006.
Last week the Dollar Index surged 4.9 percent to 86.44, as the greenback climbed 5.9 percent to $1.2623 per euro and strengthened 8 percent to $1.5897 to the pound. Its biggest gain came against the Australia dollar, rising 11.6 percent, followed by a 10.7 percent increase versus the New Zealand dollar and an 8.8 percent advance versus the South Africa rand.
Investors, banks and even companies are scooping up dollars to repay loans denominated in the currency as the 14-month-long credit crisis intensifies.
Banks have extended about $2.5 trillion in foreign-currency loans to emerging markets, according to Barclays, which cited data compiled by the Bank for International Settlements in Basel, Switzerland. Some 70 percent of the claims on developing nations in Asia mature in less than one year, while the amount for emerging European countries is 43 percent.
Demand for dollars can be seen in the Treasury market, where the Federal Reserve's holdings of U.S. government debt on behalf of foreign central banks and institutions have increased by $60.1 billion this month to $1.56 trillion. That's the biggest monthly gain on record.
When the euro was rallying 38 percent from November 2005 through July, economists said the dollar was in danger of losing its primacy. The euro's share of global central bank reserves rose to 27 percent at the end of March from 17 percent in 2000, according to the International Monetary Fund in Washington. The dollar's share fell to 62.5 percent from 72.1 percent.
The prospect of falling U.S. interest rates may offset some of the demand for the dollar. The odds on the Fed halving its target rate for overnight bank loans to 0.75 percent on Oct. 29 rose to 26 percent last week, futures on the Chicago Board of Trade showed. The chances were zero a week earlier.
The U.S. already has the lowest rates of any Group of Seven industrialized nation except Japan, where the key rate is 0.5 percent. That means even dollar bulls expect the gains may slow before picking up again later in the year or in 2009.
Another obstacle for the dollar is the flood of debt the U.S. will sell to finance the budget deficit and bank bailouts. Gross issuance of Treasury coupon securities will rise to about $1.15 trillion in the 2009 fiscal year from $724 billion last year, according to Credit Suisse Securities USA LLC, one of the 17 primary dealers of U.S. government securities obligated to bid at Treasury auctions.
As the dollar gains, the currencies of commodity-exporting nations including Australia and Canada are likely to suffer most, according to Citigroup Inc. The Australian currency has dropped 23 percent versus the greenback in the past month, while Canada's dollar has slumped 19 percent as commodities tumbled.
Canada's dollar fell to the lowest since September 2004 as its U.S. counterpart strengthened against most of the world's major currencies. The Canadian currency is headed for its worst monthly fall since at least 1950, depreciating 17 percent since Sept. 30, as stocks and commodity prices have declined. Canada's main stock index has lost more than a third of its value this year, while oil is down by more than half from its July record. Crude accounted for 10 percent of Canada's export revenue in 2007.
The Canadian dollar depreciated by as much as 1.5 percent to C$1.2972 per U.S. dollar, from C$1.2775 on Oct. 24, the lowest since Sept. 21, 2004. It traded at C$1.2914 at 2:24 p.m. in Toronto. One Canadian dollar buys 77.4...