* 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 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) 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
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
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.
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)