THE DOLLAR surged higher this week, hitting a five-month high against the euro and a 20-month peak against sterling amid a growing conviction that the effects of the credit crisis were spreading across the globe.

Yesterday the dollar put in its strongest one-day performance for eight years against the euro.

Traders said that thin August liquidity and the potential distressed selling of long-term bets against the dollar meant the risks of further large moves over the coming days were high.

The dollar showed limited reaction to the Fed's decision on Tuesday to keep its main lending rates on hold at 2 per cent. Instead, it was comments on Thursday from Jean-Claude Trichet, president of the European Central Bank (ECB), that were the catalyst for the move. The ECB, as expected, left interest rates on hold at 4.25 per cent after its policy meeting. However, Mr Trichet warned that the euro zone economy would weaken substantially in the coming months.

Analysts said the scale of positive sentiment toward the dollar was underlined by the fact that investors simply chose to ignore Mr Trichet's tough rhetoric on inflation and attempts to play down the current weakness of the euro zone economy by claiming that the economy would recover before year-end. "Market participants simply did not believe the synopsis, and the euro has tumbled," said Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ. - (Financial Times service)