Picture used for illustrative purpose. File

The dollar rose on Tuesday to six-week highs, extending gains from the previous session, as markets turned risk-averse over a surge of virus cases and new lockdown measures in Europe.

Stocks sold off on Monday and the currency market saw "risk-off" moves, with the dollar index climbing to its highest in six-weeks.

Although European equities opened higher on Tuesday, the dollar continued its ascent and riskier currencies fell, as new lockdown measures to combat a second wave of COVID-19 infections pose a threat to the global economic recovery.

The UK will see further restrictions on activity, although Prime Minister Boris Johnson is expected to stop short of announcing a full national lockdown like that imposed in March.

In Spain, the army have been asked to help fight a coronavirus surge in Madrid, while restrictions in other European countries were announced last week.

"The terms 'second wave' and 'lockdown' have been with us for a while, but so far the markets reacted only moderately cautious to the negative news flow," said You-Na Park-Heger, FX analyst at Commerzbank.

"However, as the situation seems to be deteriorating, particularly in Europe, the markets nonetheless seem to be getting nervous at this stage," she said.

Park-Heger said that even though Commerzbank does not expect more extensive lockdowns, the possibility may weigh on market sentiment for some time.

"A rapid correction of yesterday's move is therefore unlikely to be seen any time soon," she said. 

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The dollar index was up 0.3% at 93.848 at 0739 GMT, reaching six-week highs in early London trading.

Riskier currencies extended their losses, with the Australian dollar falling 0.5% to 0.7185, a one-month low. The New Zealand dollar dropped 0.4% to 0.6643 per US dollar.

The Reserve Bank of Australia said it is assessing policy options including currency market intervention and negative rates, which added to pressure on the Australian dollar.

"Coupled with the Nov US Presidential elections, the outlook for risk assets is likely to be tricky for coming weeks and months," wrote ING strategists in a note to clients.

ING said that it did not expect the dollar to see long-lasting gains, however, as dollar liquidity was not an issue as it was in March, and the U.S. Federal Reserve would step in if risk sentiment fell further.

"For DXY, we expect the 94.00 level to be strong resistance this week," they said.

The euro was down 0.4% against the dollar at $1.17235 .

The Swedish and Norwegian crowns also fell, reaching a two-month low of 9.3615 against the dollar at 0725 GMT and also weakening against the euro.

Sweden's Riksbank kept its rate unchanged at 0%, as expected, and said it is expected to remain there in the coming years.

US Fed Chair Jerome Powell will speak at a congressional committee from 1430 GMT.

Reuters