March 2 (Bloomberg) -- The dollar rose to the highest level since April 2006 against the currencies of six major U.S. trading partners as investors sought safety after American International Group Inc. got more government support.

The Dollar Index, which the ICE uses to track the U.S. currency, climbed after European Union leaders vetoed Hungary’s proposal for a 180 billion euro ($227 billion) loan to eastern European economies. The Swedish krona fell to a record versus the euro on speculation the Baltic region’s borrowers may default, and the pound and the Polish zloty tumbled.

“Risk aversion is still setting the tone for trade,” said Todd Elmer, a New York-based currency strategist at Citigroup Global Markets. “This favors some degree of additional dollar strengthening. The fact that data has been showing more propensity to surprise on the downside has been one of the legs of the negative trend on risk.”

The U.S. currency increased 0.8 percent to $1.2575 per euro at 4 p.m. in New York, from $1.2669 on Feb. 27. It reached $1.2546, the strongest level since Feb. 19. The euro dropped 0.9 percent to 122.51 yen from 123.61. The yen was little changed at 97.44 per dollar, compared with 97.57.

The Dollar Index, which tracks the greenback versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, increased to 88.969, the highest level in almost three years. The index rose 1.8 percent last week, the biggest gain since mid-January, as investors sought the safety of the world’s reserve currency. The Federal Reserve’s trade-weighted dollar index, which is updated weekly, advanced on Feb. 20 to the highest level since October 2004.

New Zealand’s Economy

New Zealand’s currency slid as much as 1.9 percent to 49.13 U.S. cents, the weakest level in 6 1/2 years, after its Treasury Department said the economy may contract more this year than forecast in December. Policy makers will lower the 3.5 percent official cash rate by 0.75 percentage point on March 12, according to the median forecast of 11 economists surveyed by Bloomberg News.

The Swedish krona declined as much as 1.6 percent to 11.6152 versus the euro, the weakest level since the European currency’s debut in 1999. Sweden holds at least half of cross- border bank lending to Estonia, Latvia and Lithuania, according to Brown Brothers Harriman & Co., which cited fourth-quarter data from the Basel, Switzerland-based Bank for International Settlements.

The pound fell below $1.40 for the first time since Jan. 27 as a report today from Hometrack Ltd. showed U.K. house prices dropped the most since at least 2001. Sterling was later quoted at $1.4054.

U.S. Stock Collapse

The U.S. currency strengthened as global equities slumped, with the Dow Jones Industrial Average falling below 7,000 for the first time since 1997. AIG will get as much as $30 billion in new government capital in a revised bailout after posting the worst loss by a U.S. corporation.

“Risk aversion is providing support to the dollar, in particular against the euro,” said Adam Boyton, a senior currency strategist in New York at Deutsche Bank AG, the world’s largest foreign-exchange trader.

The dollar also advanced on speculation the deepening global financial crisis is spurring banks to restrict lending abroad. Stephen Hester, chief executive officer of Royal Bank of Scotland Group Plc, said Feb. 26 that the U.K.’s largest government-controlled bank will cut back or withdraw from 36 of 54 countries where it operates to focus on its “heartland.”

Hungary’s Forint

The Hungarian forint dropped 3.2 percent to 244.15 per dollar, while Poland’s zloty lost 3.3 percent to 3.7925 against the greenback. The forint fell to a 6 1/2-year low of 246.32 on Feb. 17 as Moody’s Investors Service said it may cut the ratings of several banks with units in eastern Europe. The zloty touched 3.9151 the next day, the weakest since May 2004.

EU leaders spurned Hungary’s request for aid at a summit in Brussels yesterday. Growth in Poland, the biggest eastern European economy, will slow to 2 percent, the slackest pace since 2002, the European Commission forecasts. Latvia, a former Soviet republic, will contract 6.9 percent.

“There was a bit of a disappointment that the EU didn’t adopt a systemic plan to rescue eastern Europe,” Citigroup’s Elmer said. “But there have been indications they’ll be willing to provide bailouts on a case-by-case basis, and that’s why we think the pressure on Europe is a bit overdone.”

The European Central Bank will cut its main refinancing rate to a record low of 1.5 percent on March 5 to spur economic growth, according to the median forecast of 55 economists surveyed by Bloomberg.

Yen Versus Aussie

The yen gained 1.1 percent to 61.65 against the Australian dollar and 0.8 percent to 75.86 versus the Canadian dollar today on speculation central banks will lower interest rates, discouraging Japanese investors from buying overseas assets.

Australia’s central bank will lower the cash target by a quarter-percentage point to 3 percent at a meeting tomorrow, according to the median forecast of 18 economists surveyed by Bloomberg News. Policy makers are forecast to lower the Bank of Canada’s rate by a half-percentage point to 0.5 percent. Japan’s target is 0.1 percent.

The yen weakened 7.9 percent versus the dollar in February, the worst month since August 1995, on concern the deepening recession in Japan undermined the currency as a haven.

The two-year U.S. Treasury note’s yield was 0.51 percentage point higher than the comparable Japanese security today. When the spread was that wide on Feb. 12, the yen traded at 90.94 per dollar, or 7 percent stronger than today’s level.

“Investors are taking a step back to judge if the move in the yen is overdone,” said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments LLC in Boston. “The rate differential will support the yen to outperform going forward.”

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Molly Seltzer in New York at mseltzer4@bloomberg.net

Last Updated: March 2, 2009 16:03 EST