ceilidh.erickson wrote:I'm not sure that I quite understand your question. I think you mean - "why should the phrase contain a verb"? Here, it's not necessary for that participle phrase to contain a verb. The entire phrase beginning with DEFYING is modifying the subject THE US DOLLAR. But since US DOLLAR is the subject, it must have a verb to go with it.

In the original sentence, there is no verb. See what happens when we put all of the modifiers in parentheses:
(DEFYING efforts by policymakers on both sides of the Atlantic at restraining it), THE US DOLLAR, (continuing its rise), (reaching its highest level in six years against the German mark).

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ceilidh.erickson wrote:I assume you'd like an explanation, and not simply the correct answer!

There are two major issues here: MODIFIERS/CLAUSES and IDIOMS.

Whenever you see a sentence that begins with a present participle like DEFYING, it's a modifying phrase, and it needs to modify the subject that comes directly after the comma:
Defying (something)... the US dollar (did something)...

In the original sentence, there is no verb for the subject "US Dollar."

In B, the subject is changed to "rise": Defying (something)... the rise (of the US dollar) continued...

In C, D, and E, the subject is "US dollar," and the verb are in agreement. However, in E "and to reach" is no longer a modifier, and it's not parallel to the verb "is continuing its rise," so E is out.

The next issue is idioms: AT RESTRAINING v. TO RESTRAIN. Here, EFFORT requires TO RESTRAIN. The answer is D.