Dollar dives as US Treasury chief talks currency down

"Obviously a weaker dollar is good for us, is good as it relates to trade and opportunities, but longer-term I think the strength of the dollar is a reflection of the strength of the US economy..." Mnuchin said at the World Economic Forum in Davos.

His comments were widely interpreted as a green light from Washington to let the value of the dollar crumble so US exports become cheaper for buyers in other countries.

'Bloodbath'

"The US dollar bloodbath continues," said James Hughes at Axitrader, and is "becoming just as much a hallmark of the Trump presidency as the equity market rally", he observed.

"The dollar isn't dead," Hughes wrote in a note to clients, "but it certainly has a problem with Trump. Who doesn't!"

In Wednesday trading, the euro reached $1.2402 -- the highest level since December 2014.

"Mnuchin said what we all know, that a weaker dollar is 'good' for US trade," said Fawad Razaqzada, market analyst at Forex.com.

The dollar had already been weakened by US President Donald Trump's announcement earlier this week of steep tariffs on imports of solar panels and large washing machines, angering China and South Korea.

US Commerce Secretary Wilbur Ross, also in Davos, defended the tariffs and said Washington would not flinch from reprisals against countries that flout the rules.

The dollar's sell-off was also helped by investors betting on tighter monetary policies by major central banks, bringing them in line with the Federal Reserve.

The greenback fell below 110 yen for the first time since September, and the pound shot up to hit $1.4241.

What will Draghi say?

The European single currency also profited from accelerating business activity in the eurozone, while sterling won a boost from rising expectations of more UK interest-rate rises this year after British unemployment data was well-received by markets.

Investors are now looking to Thursday's European Central Bank meeting for any reaction by ECB chief Mario Draghi to the euro's surge amid strong signs that the bank is planning to wind down its support for the bond market and ultimately raise interest rates.

But any prolonged strength of the euro would already go a long way in that direction as the currency's strength puts an unwelcome damper on inflation which the ECB is desperately trying to rekindle.

"Draghi will have to clarify things," Societe Generale economist Michel Martinez said.

As so often before, the smooth-talking ECB chief will likely play for time in hopes that other factors - such as wage growth in the eurozone - will fire price growth, many analysts expect.

Wall Street's happy

In commodities trading, gold hit a four-month high at $1,349.40 an ounce as the US currency weakened, while oil futures stabilised.

Europe's main stock markets fell as rising local currencies weighed on multinationals earning in dollars.

By contrast, Wall Street showed solid gains as the weak dollar favoured US exporters, likely boosting their foreign earnings.

Earlier, Asian share indices shrugged off profit-taking to press on with a new year rally that has sent Hong Kong to successive record highs.

However, Tokyo was unable to join in, with exporters hit by a strengthening yen.

Optimism about the global economy which was reinforced this week by the International Monetary Fund, strong earnings reports and Trump's tax cuts have helped fuel a surge in global equities which many expect to continue.

Key figures around 1635 GMT

Euro/dollar: UP at $1.2392 from $1.2300 at 2130 GMT

Pound/dollar: UP at $1.4221 from $1.4001

Dollar/yen: DOWN at 109.04 yen from 110.32 yen

London - FTSE 100: DOWN 1.1 percent at 7,643.43 points (close)

Frankfurt - DAX 30: DOWN 1.1 at 13,414.74 (close)

Paris - CAC 40: DOWN 0.7 percent at 5,495.16 (close)

EURO STOXX 50: DOWN 0.8 percent at 3,643.22

New York - DOW: UP 0.4 percent at 26,313.33

Tokyo - Nikkei 225: DOWN 0.8 percent at 23,940.78 (close)

Hong Kong - Hang Seng: UP 0.1 percent at 32,958.69 (close)

Shanghai - Composite: UP 0.4 percent at 3,559.47 (close)