Dollar, yen climb as flu outbreak sours risk appetite

NEW YORK (Reuters) - The U.S. dollar and yen rose across the board on Monday as worries about a widening outbreak of swine flu in Mexico drove investors to seek shelter in the perceived safety of both currencies.

The euro, meanwhile, posted its biggest one-day fall against the dollar in a month after a top European Central Bank official said the bank was ready to use quantitative easing measures if needed.

News of the flu pandemic, which drove fears about a delay in any global economic recovery, pushed the yen to a one-month peak versus the dollar and a six-week high versus the euro, and likewise weighed on U.S. stocks. The flu scare also drove the Mexican peso to its worst performance against the greenback in six months and pressured currencies seen as higher risk, such as the Australian and New Zealand dollars.

"The swine flu has pushed traders to the safety of the yen, although I don't expect this to have a very long life," said Andrew Wilkinson, senior market analyst at Interactive Brokers in Greenwich, Connecticut. "The news has the potential to reduce travel, tourism, trade, and to keep consumers away from the malls."

In late afternoon trading, the dollar fell 0.4 percent against the yen to 96.80 yen, close to an earlier one-month low around 96.44 yen, according to Reuters data. The euro lost 1.9 percent to 125.82 yen. It earlier fell to around 125.61, the lowest since March 16.

Against the dollar, the euro fell 1.7 percent to $1.3028, its worst day since March 27, extending losses after ECB governing council member Ewald Nowotny said euro zone rates will stay low for a long time. He also set the stage for possible unconventional measures of quantitative easing.

ECB President Jean-Claude Trichet, on the other hand, hedged a little on quantitative easing, but kept the door open. He said any announcement on nonstandard policies will be announced at the ECB policy meeting on May 7.

The ECB is widely seen cutting its key interest rates to 1 percent from 1.25 percent at that meeting.

EURO, MEXICAN PESO WOES

"Euro/dollar has dropped more than a big figure since ECB's Nowotny's comments," said an analyst with Forex.com in Bedminster, New Jersey. "It's still not a done deal for the ECB on quantitative easing, but for the time being and until we hear otherwise, markets look set to exact punishment on the euro."

The Mexican peso, meanwhile, traded at around 13.9410 per dollar, with the greenback up 4.7 percent on the day, its best performance since October 2008. The U.S. dollar also hit a nearly one-month high at 13.9760 pesos.

The swine flu in Mexico, which has spread across North America and as far as New Zealand, may have killed 149 people and the number of cases is seen rising, according to Mexican Health Minister Angel Cordova.

An increase in risk aversion on concerns the flu may turn into a pandemic also stung the higher-yielding Australian dollar, down 1.8 percent against the U.S. dollar at US$0.7104, and the New Zealand dollar, down 0.7 percent at US$0.5683.

The New Zealand currency was also pressured because its central bank is expected to cut interest rates to a record low of 2.5 percent this week and signal no chance of a rise for a while.

Analysts noted, however, that the intense overall risk aversion may be overdone and could fade as long as news on the flu outbreak wanes.

"If the virus outside Mexico remains mild with none/few fatalities, this story will remain contained," said Alan Ruskin, chief international strategist at RBS Global Banking and markets in Greenwich, Connecticut.

"If it gets serious, obviously the repercussions will not be isolated to Mexico and it will be harder to pick on the Mexican peso on a relative currency play."

(Additional reporting Nick Olivari; Editing by Leslie Adler)