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Monday March 2, 2009 - 11:34:40 GMT
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FOREX NEWS-Dollar gains as AIG news sparks flight to safety

Mon Mar 2, 2009 6:02am EST

* Bank concerns boost dollar as investors seek safety

* Dollar index at 3-yr high .DXY; euro down 0.6 pct vs dlr

* U.S. set for $30 bln AIG bailout, HSBC in rights issue

* EU leaders reject mass east Europe bailout; EZ PMI weak

(Adds quotes, updates prices)

By Jessica Mortimer

LONDON, March 2 (Reuters) - The dollar gained on Monday, hitting a three-year high versus a basket of currencies, as the prospect of another U.S. bailout for American International Group sparked a flight into perceived safer assets.

It gained in particular against the euro as a summit of European Union leaders rejected a mass bailout of countries in eastern Europe [ID:nL1547427] and a survey showed euro zone manufacturers had their worst month in 12 years [nL2213083].

Sources said overnight that the U.S. government is to throw a new $30 billion lifeline to the insurer AIG (AIG.N: Quote, Profile, Research, Stock Buzz) as it prepares to report what is expected to be the biggest quarterly loss in corporate history later on Monday [ID:nN01344575].

The news stoked further concerns about the beleaguered financial sector, pushing European shares .FTEU3 down more than 3 percent and benefitting the dollar, which continues to be seen as the safest currency in times of deep uncertainty.

"The AIG bailout is being looked at closely - there is so much uncertainty out there about how many more bailouts there will be and the dollar at the moment is the main beneficiary," CMC Markets analyst James Hughes said.

Further concerns came as HSBC HSBC.L launched a 12.5 billion pound ($17.7 billion) rights issue at a deep discount after annual profit more than halved and bad debts soared in the U.S. [ID:nHKG49918].

At 1033 GMT, the dollar index was up 0.4 percent at 88.551 .DXY, not far off an earlier session high of 88.822, its highest level in almost three years.

The euro fell 0.6 percent against the dollar to $1.2598 <EUR=>. Among other currencies seen as higher risk sterling fell 0.7 percent to $1.4208 <GBP=> and the Australian dollar lost 0.6 percent to $0.6357 <AUD=>.

"There's a roll call of reasons to stay risk averse -- the news from AIG, HSBC and worries about eastern Europe and that is benefitting the dollar," UBS currency strategist Geoffrey Yu said.

Elsewhere, the yen rose broadly, particularly against currencies other than the dollar as investors considered that the recent losses in the currency in the wake of grim Japanese economic data may have been overdone.

The dollar fell 0.3 against the yen to 97.18 yen <JPY=>, while the euro was down 0.9 percent at 122.47 yen <EURJPY=R>.

"Sentiment is still negative towards the yen, but at the same time the market may have got ahead of itself in terms of short-term positioning," UBS' Yu said.

EURO FALLS

Yu added that the euro came under more pressure after EU leaders were considered not to have reached any meaningful agreement on eastern Europe.

"The market is still very negative on the euro and signs of division in Europe and suggestions that Germany is turning its back on eastern Europe are not helping," he said.

Hungary led calls for a 180 billion euro aid package to rescue east European economies whose currencies have been battered by the economic downturn, but EU leaders agreed only to look at helping countries on a case-by-case basis.

Meanwhile, there was more bad news out of Europe on Monday, with a purchasing managers' survey measuring manufacturing activity in the euro zone sinking to a record low in the survey's history of 33.5 in February.

This was a touch lower than the flash reading of 33.6, which was also the consensus forecast, and shows that the recession in the region is showing no signs of easing.

A similar poll on the UK fell more than expected to 34.7 last month, with British manufacturers slashing jobs and output at a record pace as export orders plunged [ID:nLAG003259].

Investors will be looking to upcoming data, including Monday's U.S. manufacturing index from the Institute for Supply Management and jobs data later this week for more clues on the depth of the recession.

Rate decisions by the Reserve Bank of Australia and the Bank of Canada on Tuesday and the Bank of England and the European Central Bank on Thursday will also be on the market's radar.

(Reporting by Jessica Mortimer; Editing by Victoria Main)

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