LONDON, Jan 21: The dollar rose strongly against the euro on Monday, benefiting even as stock markets tumbled on the view that a US slowdown will hit the global economy, dealers said.

They said ‘carry-trade’ investors, who had been putting money into higher-yielding currencies, were now cutting back on those positions to the benefit of the dollar, which still offers safe haven qualities.

The prospect that US President George W. Bush’s call on Friday for steps to boost the US economy, coupled with sharp cuts to interest rates, will eventually have an impact also made the dollar a better bet on the day.

Normally, lower interest rates put a currency under pressure in the short-term but if they point to higher growth longer-term, then they can attract interest in a unit.

At the same time, with US markets closed for the Martin Luther King holiday, volumes were relatively thinner than normal and this meant any movement was magnified disproportionately, dealers said.

The typical carry trade strategy is now down eight per cent (for the) year to date and continued unwinding of positions is expected, maintaining the out-performing position of low-yielders, said an analyst at BNP Paribas.

Meanwhile, the euro softened in its own right after weak German wholesale price figures as well as more dovish comments from officials at the European Central Bank.

German factory gate prices fell 0.1 per cent on the month in December, compared with expectations for a 0.2 per cent gain.

Some market participants now believe that despite warnings to the contrary, the ECB will be reluctant to hike interest rates again despite its concerns over inflation, a view that has been weighing on the euro since last week.

In late European trade on Monday, the euro was down sharply at $1.4440 from $1.4491 in early trade and $1.4619 in New York late on Friday.

The dollar in turn dipped to 105.90 yen from 106.85 yen late on Friday as carry trades in the Japanese currency were unwound.

European stock markets tumbled on Monday, with London down more than five per cent, and Paris and Frankfurt, with losses of more than six and seven per cent, respectively, chalking up their biggest single day losses since the 9/11 terror attacks in 2001.

On Friday, President Bush had called for a $140 billion stimulus plan to help bolster the flagging US economy.

Despite the fact that markets remain unimpressed with the US economic stimulus package proposed on Friday, the dollar has held up well, ABN Amro analyst Melinda Smith said on Monday.

The US Federal Reserve is widely expected to lower its key rates by half a percentage point when policymakers meet on January 29-30.

The market has now priced in around a 72-percent chance of a 50-basis-point rate cut by the Fed ... and anything short of that might trigger more (dollar) selling, Smith said.

In European trading on Monday, the euro changed hands at $1.4440 against 1.4619 late on Friday, at 153.14 yen (156.16), 0.7426 pounds (0.7477) and 1.6025 Swiss francs (1.6056).

The dollar stood at 105.90 yen (106.85) and 1.1096 Swiss francs (1.0980).

The pound was at $1.9448 (1.9553).—AFP