The euro yesterday hit its highest level against the dollar since November 1999 as the US currency eased against most other major currencies on heightened worries about North Korea's nuclear ambitions.
Economists also attributed the dollar's fall to poor consumer spending data and lingering worries about possible war with Iraq.
Just weeks after an interest rate cut by the European Central Bank, the euro's rise was not linked to a change in sentiment about the euro zone's economic prospects.
"There's a major concern about consumer spending, not just for the US but for the whole world," said the chief economist at IIB Bank, Mr Austin Hughes.
"The US consumer has been the rock to which the US economy has clung. The concern is that if the US consumer starts to wilt, this will be felt first in the US and then throughout the world."
The dollar also crept lower versus the Swiss franc, in the process reaching a fresh four-year low, as investors sought a safe haven at a time of growing geopolitical uncertainty.
With economists noting that very thin post-Christmas trading tended to aggravate market developments, the dollar's weakness was also linked to confirmation by the International Atomic Energy Agency (IAEA) that North Korea had asked its inspection staff to leave the country.
The IAEA said it was drafting a response. The IAEA on Thursday said it had "serious nonproliferation concerns" after North Korea said it planned to restart a small nuclear reactor, which had its use frozen in 1994.
"North Korea and Iraq are still the focus," said Mr Hugh Walsh, vice-president at Fortis USA in New York. "The dollar is weak across the board and people continue to look at the Swiss franc especially as a safe haven."
Against the Swiss franc, the dollar was off a half per cent at $1.3941. It was down by about a third of a per cent against the euro at $1.0411, having fallen earlier as low as $1.4019, its lowest level since hitting $1.0435 on November 18th, 1999.
The dollar is seen as the most vulnerable to global tensions, partly due to US involvement in world hot spots but also because, during times of uncertainty, investors tend to favour countries cushioned by current account surpluses. The US has a large current account deficit.
US stocks were trading lower at midday, burdened by geopolitical worries, persistently high oil prices and soft corporate profits. The Dow Jones Industrial Average was down 0.8 per cent, while the Nasdaq Composite had shed 0.7 per cent.
The Canadian dollar, which has been on a firming trend versus the US dollar since mid-November, was also succumbing to global political concerns. "When geopolitical risks exist, the Canadian dollar trades like an emerging market currency. There is no liquidity at year-end and that makes it even worse," said Mr David Ebata, managing analyst at Thomson IFR in Boston. The US dollar was up 0.66 per cent against its Canadian counterpart at C$1.5679, its highest in a month.
Preoccupied as it is with global security concerns, the foreign exchange market paid little attention to US home sales data.
The market was similarly uninterested in news that Japanese industrial production fell a surprise 2.2 per cent in November.
Economists had predicted a far more modest 0.4 per cent fall.
The yen seemingly has been immune to poor Japanese economic data recently as it benefits from widespread bearishness toward the dollar.
But the yen's gains have been stemmed by aggressive verbal intervention from Japanese officials and fears that the Ministry of Finance could back up words with action. - (additional reporting by Reuters)
