By Christina Fincher
The dollar leapt as much as one percent against major currencies on Tuesday as reports that Afghanistan's ruling Taliban had withdrawn from Kabul extended relief buying on indications that Monday's New York plane crash was an accident.
On Monday, the dollar slid to one-month lows against the yen and fell as much as one percent against European currencies on concerns the American Airlines Airbus crash could be a follow-up to the September 11 attacks.
But airline safety investigators said all evidence pointed to an accident, allowing the dollar to jump over one percent against the Swiss franc and hit two-month highs against the euro.
"A lowering in the general level of uncertainty has helped the dollar recover to pre-plane crash levels," said Francesca Fornasari, foreign exchange economist at Lehman Brothers. "News of the Taliban retreat from Kabul has also been seen as a dollar positive."
The dollar's rise beyond $0.8865 per euro was also blamed on disappointing French inflation data. French consumer prices unexpectedly rose in October, denting the prospect of further growth-boosting interest rate cuts from the European Central Bank.
A threat to resign from German Chancellor Gerhard Schroeder and break up the ruling coalition if it did not back him in a vote on troop mobilisation also weighed on sentiment, dealers said.
JAPAN KNOCKS YEN
The dollar's rally against the yen was further aided after Japan's senior finance ministry official Zembei Mizoguchi, reiterated the government stood ready to intervene to cap yen strength.
His comments helped the dollar rise almost one percent on the day to highs around 121.30 yen in early European trade, putting it well above one-month lows below 119.70 hit immediately after the crash.
Talk that Japan's Furukawa Electric Co Ltd <5801.T> was buying dollars to complete its purchase of a U.S. optical unit from Lucent Technologies Inc also swirled through trading floors.
The original $2.75 billion deal has been delayed twice and Furukawa faces a deadline of November 16 to settle.
But dealers said relief that Monday's plane crash appeared to be no more than a tragic accident and the reported Taliban retreat were the main forces driving currencies.
"The military developments in Afghanistan came as a surprise," said Steven Englander, global currency economist at Citibank in London. "The fact that the plane crash does appear to be an accident means that the weakness we saw in the dollar yesterday has been more than unwound."
Indications of a strong opening on Wall Street were also helping the dollar.