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U.S. dollar surges in May as European debt crisis takes center stage

06-01-2011 16:26 BJT

NEW YORK, May 31 (Xinhua) -- The U.S. dollar rallied in May, mainly driven by risk aversion as the European debt crisis took center stage and hurt investors' faith in the euro.

In the first trading sessions of this month, the dollar experienced a short-lived surge against other major currencies, as the news that al-Qaida leader Osama bin Laden was killed inspired optimism.

However, in the remaining trading sessions this month, the European debt crisis again drew investors' attention and remained a major threat to the euro, with the debt problems in Portugal and Greece being among the most serious in the eurozone.

The rating agency Fitch lowered its credit rating on Greece to B-plus from BB-plus on May 20 and warned that any attempt to extend the maturities of Greek sovereign debt would be considered a default.

The deadline of Greek debt was approaching, but the Greek government and opposition party failed to reach agreements on an austerity plan. The German weekly Der Spiegel even reported on its website that eurozone finance ministers are meeting secretly in Luxembourg to discuss worries about Greece's potentially leaving the eurozone.

European finance ministers were trying to make things right by holding a two-day meeting in Brussels this month to discuss details of Portugal's bailout and how to address Greece's renewed debt problems, but failed to raise any effective solutions.

Meanwhile, the sex scandal surrounding former International Monetary Fund (IMF) chief Dominique Strauss-Kahn brought new uncertainties regarding a resolution of the eurozone debt crisis.

The IMF said that "bold steps" are needed to tackle the eurozone's sovereign debt crisis, adding that additional financial aid from international organizations was needed to help resolve the Greek debt problems in order to avoid debt restructuring, which most of the European Central Bank (ECB)'s officials voted against, or default.

Investors' faith in the shared currency was shattered as the euro dipped 2.7 percent against the greenback this month.

Meanwhile, the monetary policy decisions made by European central bankers helped ease expectations of further tightening measures in European countries.

The ECB maintained its benchmark interest rate at 1.25 percent in its May monetary policy meeting, after raising it by 25 basis points at its April meeting to fend off inflation.

Also, the Bank of England decided in May to maintain the official bank rate paid on commercial bank reserves at 0.5 percent, as recently released data showed the economic recovery in Britain was still weak.

The dollar index, which is regarded as the best gauge of its performance against a basket of six currencies, was up nearly 2.5 percent this month.

The dollar's surge, however, was somewhat limited by investors' concern about U.S. economic prospects, as the housing market was still weak and the unemployment rate remained high.

According to a survey released by the National Association for Business Economics this month, economists cut projections for 2011 U.S. economic growth from 3.3 percent to 2.8 percent, but maintained its forecast for moderate economic growth through 2012.

As for other currencies, the dollar rose 0.3 percent against the Japanese yen this month as Japan's economy was hit hard by an earthquake and tsunami in March. The British pound dipped 1.2 percent against the greenback as Britain was facing sluggish economic growth and potential inflation.

Editor:Yang Jie |Source: Xinhua

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