April 17 (Bloomberg) -- The dollar rose from a record low against the euro as Luxembourg Finance Minister Jean-Claude Juncker said financial markets have misunderstood the Group of Seven's position on currency volatility.

The U.S. currency started to gain after failing to weaken beyond $1.60 and gathered momentum after Juncker said the euro's recent advance against the dollar isn't ``desirable.'' The pound climbed against all of the major currencies on speculation the Bank of England will announce a plan next week to help end a logjam in money markets.

``Juncker came out to say that the G-7 message points to possible joint intervention,'' said Matthew Strauss, senior currency strategist in Toronto at RBC Capital Markets Inc., a unit of Canada's biggest bank by assets. ``That triggered the knee-jerk reaction to buy back the dollar. There's increasing political pressure to urge the European Central Bank to do something about the euro.''

The dollar increased 0.4 percent to $1.5884 per euro at 4:09 p.m. in New York, from $1.5947 yesterday. It earlier touched the all-time low of $1.5983. The dollar advanced 0.8 percent to 102.64 yen, compared with 101.83 yen yesterday. The euro rose 0.4 percent to 163.04 yen after touching 163.24, the highest level since Jan. 2.

Iceland's krona fell against all but three of the 178 currencies tracked by Bloomberg after Standard & Poor's lowered the country's credit ratings, citing the vulnerability of banks to the global credit crunch. The krona lost 1.3 percent to 75.10 per dollar and declined 0.9 percent to 119.27 per euro.

Stronger Sterling

Sterling increased 1.3 percent against the euro after reaching a record low of 80.99 pence yesterday. The Bank of England may announce a plan to temporarily exchange troubled mortgage-backed debt on banks' balance sheets for government bonds to help them resume lending, BBC Radio 4 reported. The British currency increased 0.9 percent to $1.9904.

The dollar also reached a record low against the euro yesterday, five days after G-7 finance ministers said following a meeting in Washington that they're concerned ``sharp fluctuations'' in currency markets may hurt the global economy.

``I don't have the impression that financial markets and other actors have correctly and entirely understood the message of the G-7 meeting,'' said Juncker, who leads a group of finance chiefs of the 15 nations that share the euro, at a press conference in Luxembourg today. The euro has moved in a direction ``I don't consider desirable,'' he said.

Currency Volatility

Implied volatility on options for the six most actively traded currencies against the dollar rose to 11.69 percent yesterday, according to an index compiled by JPMorgan Chase & Co. The gauge touched a decade high of 14.48 on March 17, a level at which the G-7 bought the dollar to check its decline in a coordinated move in 1995.

``Juncker's comments made a few people a little bit nervous, but the market still wants to test where the threshold will be for the central banks to get in,'' said Jay Bryson, global economist at Wachovia Corp in Charlotte, North Carolina. ``As long as the concern about the U.S. economy is there, as long as data comes in weak, it's hard to see a sustained dollar rally.''

The dollar briefly pared its gain versus the euro as manufacturing in the Philadelphia region contracted in April by the most since 2001. The Philadelphia Fed's general economic index fell to minus 24.9, from minus 17.4 in March, the bank said today. Readings less than zero signal contraction.

The dollar extended its gain against the euro as Dallas Fed President Richard Fisher said in a speech in Chicago that he's hesitant about lowering interest rates further, warning against ``inflating'' the economy out of the credit crisis.

Fed Rate Cuts

The U.S. currency has dropped 13 percent against the euro since September as the Fed cut the target lending rate 3 percentage points to 2.25 percent to protect the economy from the collapse of the subprime-mortgage market. Futures on the Chicago Board of Trade show an 8.4 percent chance the central bank will cut the fed funds target to 1.50 percent by August, compared with 44.4 percent odds a month ago.

The ECB will assess whether its 4 percent main refinancing rate is high enough to contain ``intolerably'' high inflation, ECB council member Axel Weber said in a speech today in Frankfurt. ``Recent movements on foreign-exchange markets are of concern for us,'' said Weber, who heads Germany's Bundesbank, to reporters.

The euro rose as much as 1.2 percent against the dollar yesterday after a report showed European inflation accelerated to 3.6 percent last month, the highest in almost 16 years.

``It's hard for European officials as a group to talk the euro lower when inflation is still very high,'' said Nick Bennenbroek, head of currency strategy in New York at Wells Fargo Bank. ``The market doesn't feel uncomfortable with the euro versus the dollar at these levels. The market wants to see the G-7 back up their words with actions.''

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Bo Nielsen in New York at bnielsen4@bloomberg.net.

Last Updated: April 17, 2008 16:11 EDT