The Japanese yen and Swiss franc firmed on Friday as a fiscal stimulus package failed to ease US recession fears, prompting investors to shun risky assets such as stocks and higher-yielding currencies. US President George W. Bush on Friday called for an economic stimulus plan equal to 1.0 percent of US gross domestic product, or up to $140 billion.
The plan would focus on tax cuts for individuals and businesses rather than expanding federal government spending. But the White House measure failed to lift sentiment in the stock market, with investors sceptical that the amount of aid under the plan would be enough.
As US equities fell investors unwound risky trades financed with low interest rate currencies such as the Japanese yen and Swiss franc. "The story is still about risk aversion. The strengthening of the Swiss franc and yen against the euro predominantly is a function of the pessimism about the global economy," said Joe Francomano, vice president of foreign exchange trading at Erste Bank in New York.
By late afternoon, the dollar had reversed gains against the yen to trade 0.2 percent lower at 106.61 yen. The euro also fell 0.4 percent versus the yen to 155.83.
"With regard to the stimulus package, I don't think it can really do much. The stock market didn't really buy it," said Framcomano. The Swiss franc, another low-yielding currency, benefited from heightened risk aversion. The dollar slipped 0.1 percent to 1.0993 francs, while the euro slid 0.3 percent to 1.6071 francs.
The euro traded down 0.3 percent against the dollar at $1.4613, mainly weighed down by its losses versus other currencies, traders said. US Treasury Secretary Henry Paulson on Friday also threw his support behind the fiscal stimulus program but said the economy was not in danger of stalling.
Federal Reserve Chairman Ben Bernanke, in testimony before the House of Representatives' Budget Committee on Thursday, also backed the idea that the struggling economy needed rescue.
Interest rate futures have already fully priced in a half-percentage point federal funds interest rate cut by the Fed at its regular policy meeting on January 29-30, with some seeing an even larger, 0.75 percentage point cut. Further adding to the gloom in the market was a drop in the US Conference Board's leading indicators index for the third straight month, implying economic growth will remain sluggish and may weaken.
US markets are closed on Monday for the Martin Luther King Day holiday, but next week the focus will still be on the beleaguered stock market, with technology companies reporting earnings. Data for US existing home sales in December will also be reported and analysts polled by Reuters expect a decline.
"A slight decline in sales, and seasonal drop in inventories, should not be viewed as a signal that the housing market is near a trough," said Brian Bethune, a US economist at Global Insight in Lexington, Massachusetts. He does not expect the housing market to show signs of stabilising until the middle of 2008.
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