The dollar surged to its highest since January versus the slumping euro on Wednesday, as enthusiasm about Italy’s successful bond auction gave way to concerns about the European banking sector.
The euro weakened after a report in the Financial Times indicated that Euro zone banks have deposited record amounts of cash at the European Central Bank last week.
Meanwhile, significant drop in Italian borrowing costs failed to generate much appetite for stocks.
The Italian Treasury sold its maximum target of EUR 9 billion of 179-day bills at a rate of 3.251 percent, half of the euro-record 6.504 percent paid in the previous auction held on November 25. The country is set to face another test on Thursday when it auctions its long-term debt.
The dollar jumped to $1.2930 versus the euro, and was threatening to take out its January highs. A move to $1.2870 would take the dollar to its highest since October 2010.
The dollar also surged higher versus the sterling, rocketing to $1.5457 from $1.5675, as traders abandoned riskier assets ahead of the New Year’s break.
A late morning rally drove the dollar to Y78 versus the yen.
In economic news, the U.K. job market is set to face its toughest year in two decades next year as unemployment is forecast to rise further, a think tank reportedly said Wednesday.
Unemployment is forecast to climb to 2.85 million by the end of 2012 and the jobless rate will rise to 8.8 percent, the Chartered Institute of Personnel and Development (CIPD) said. Joblessness is seen peaking at 2.9 million in the first half of 2013.
Industrial production in Japan declined a seasonally adjusted 2.6 percent on month in November, the Ministry of Economy, Trade and Industry said in Wednesday’s preliminary reading.