US dollar loses ground despite confidence data

The US dollar found itself on the defensive on many fronts yesterday as yield-hungry investors pushed the euro past a key barrier to a four-year high, unlocking gains for other currencies.

The euro was at US$1.1136 against the dollar in afternoon trading in London after reaching a high of $1.1148, its highest value since February 19, 1999.

Earlier, the Australian dollar was driven to a fresh three-year high of 62.45 US cents in Sydney dealings, before settling back slightly at 62.26 cents.

The latest gains by the euro caught some analysts off-guard after a jump in US consumer confidence numbers released on Tuesday suggested the greenback would see buying.

'It was a surprise to see the euro opening so strong this morning. It broke through the previous highs very easily,' said Pieter van der Schaft, regional chief economist at Barclays Capital. 'Everybody is hunting for yields and there is still a higher yield in Europe than the US.'

Ten-year German government bonds were yielding 4.14 per cent against 3.92 per cent for equivalent US treasuries, Mr van der Schaft said. Yet depressed economic conditions in Europe meant that bond prices might go higher, giving capital gains as well as yield for buyers.

Insurers, which have been reducing their equity exposure in the past year after getting burned in a three-year bear market, have also been gingerly moving into more exotic currencies lured by even higher yields.