Falls in European share prices stemming from bank sector concerns boosted the dollar, which tends to gain when investors shed risk assets. That also helped the yen, which strengthened against the euro and dollar.

European shares were down 1.9 percent by mid-morning, with banks the biggest fallers after disappointing results from UBS and a shake-up of UK banks. The DJ STOXX European bank index was down 3.6 percent.

The euro slipped to a four-week low of $1.4646, reversing the previous day’s gains on firm manufacturing data.

“There is a general sense of risk aversion,” said Geoffrey Yu, currency strategist at UBS.

Some attributed losses in banks shares and the euro partly to European Commission estimates of bank losses renewing concerns over the sector’s health.

The EU Commission quoted results of stress tests in the banking sector, published in early October, which said losses could amount to 400 billion euros in 2009-10.

“Although several financial stress indicators are back at pre-crisis levels, the banking sector remains fragile,” the Commission said.

The euro also fell 1.0 percent against the yen to 132.01 yen while the dollar also dropped 0.3 percent against the Japanese unit to 90.01 yen.

Tokyo markets were closed on Tuesday for a national holiday.

Sterling tumbled to a one-week low against the dollar after the UK Treasury announced a shake-up of British banks, which raised concerns about its financial system.

The government will raise its stake in Royal Bank of Scotland and Lloyds Banking Group raised a record 13.5 billion pounds ($22 billion) in a rights issue.

The dollar index rose to 76.742, its highest since early October.

Some traders said profit-taking on risk assets, already seen in equities, could materialise ahead of funds’ book-closings this month and next.

“Year-end position liquidation could also prove disruptive to capital markets as investors crystallise this year’s gains,” said UBS’s Yu.

Wary ahead of fed

Traders remained wary ahead of big events this week — the U.S. Federal Reserve starts a two-day policy-setting meeting on Tuesday and the European Central Bank and the Bank of England also hold policy meetings later in the week. Key U.S. jobs data is due out on Friday.

The Fed is expected to keep its benchmark interest rate unchanged near zero, where it has been since December. The focus is on how policymakers will represent future options, but many analysts say the Fed is unlikely to change the wording of its pledge to keep rates low for an “extended period.”

The Fed will announce its decision on Wednesday.

The Australian dollar fell more than one percent against the U.S. dollar to $0.8916, extending losses after the Reserve Bank of Australia (RBA) raised its cash rate for the second month running, to 3.5 percent from 3.25 percent, as expected, but left markets guessing if it would hike again as soon as December.

Markets were still pricing in the chance of a 25 basis point increase in December, albeit a reduced chance.

Commodity currencies rose in the Asian session after the International Monetary Fund sold 200 tonnes of gold to the Reserve Bank of India, executing half of a long-planned sale.