Dollar Up, Euro Falls On Eastern Europe Worries

The dollar rose to its highest since early December against a basket of currencies at 87.685 and was last 1.16 percent higher at 87.521.

The dollar rose broadly while the euro hit a more than two-month low on Tuesday, pressed by concerns over a recession in eastern Europe and the knock-on effect on European banks.

The U.S. currency rose against the yen after Japan's finance minister said he would resign following criticism of his behaviour at a weekend Group of Seven news conference in Rome.

Ongoing concerns over the global economy, banks' balance sheets and corporate results kept investors wary with European shares falling in early trade, echoing losses in Asia.

Credit rating agency Moody's said the recession in emerging Europe was likely to be more severe than elsewhere and would put financial strength ratings of local banks and their Western parents under pressure, fuelling simmering investor jitters about the region.

"Concerns on exposure to East Europe are growing and the euro, the Swiss franc and the Swedish crown are the obvious losers in that environment so a period of independent euro weakness is quite likely," said Adam Cole, global head of FX strategy at RBC Capital Markets.

Moody's said the combination of higher provisions for bad debt, the rise in bank borrowing costs and falling currencies would weigh on the profitability of the banks concerned and erode their capital base.

The euro dropped as low as $1.2602 on Tuesday, its lowest since early December on trading platform EBS. By 0832 GMT, it was down 1.26 percent at $1.2616, according to Reuters data. The euro fell 0.76 percent to 116.26 yen.

The dollar rose to its highest since early December against a basket of currencies at 87.685 and was last 1.16 percent higher at 87.521.

U.S. markets were closed for a holiday on Monday.

RISK AVERSION

The European currency was also under pressure on growing expectations that the European Central Bank will ultimately have to play catch up on rate cuts made by the Federal Reserve and Bank of England.

Figures derived from Eonia rate futures show the market anticipating euro zone interest rates will fall below 1.0 percent later this year, with a cut to a record low of 1.5 percent in March.

ECB President Jean-Claude Trichet said on Monday the economic situation was extremely difficult but policymakers must avoid laying the ground for future disorder, while another ECB official described the outlook for 2009 as "dismal".

UBS strategists said the ECB's refusal to discuss alternative monetary easing tactics could hurt the euro.

"All other central banks in the G10 have frontloaded cuts one way or another and are openly discussing aggressively adopting unconventional measures," said UBS strategist Geoffrey Kendrick in a note.

"We believe the ECB's refusing to consider other options will continue to cast the euro zone in a negative light and sentiment on the EUR will suffer accordingly."

The yen briefly weakened to its lowest in more than a month, at 92.75 per dollar, after Japanese Finance Minister Shoichi Nakagawa said he would resign after being forced to deny he was drunk at a G7 news conference..

Nakagawa said he intended to resign after the government's budget was passed by the lower house of parliament, though he many not last even that long, according to a number of analysts .

The dollar was last up 0.5 percent at 92.15 yen.

Analysts said currency markets were also looking to a Tuesday deadline for U.S. car giants General Motors Corp and Chrysler LLC to submit turnaround plans showing how they can be made viable after receiving $13.4 billion in emergency aid.