The dollar ceded gains on Thursday as US stock futures moved into positive territory, but persistent wariness over the global economic outlook was expected to support the US currency and the low-yielding yen. Recession fears became a reality in Germany, where gross domestic product contracted by 0.5 percent in the third quarter, tipping Europe's biggest economy into recession for the first time in five years.
Shortly after the data's release, the Organisation for Economic Co-operation (OECD) cut its economic forecasts for the United States, Japan and euro zone, and said the 30-nation OECD area appeared to have entered recession. The projections were released before an emergency meeting in Washington this weekend of leaders from the Group of 20 developed and developing countries.
"I would think there is still upside for both the dollar and the yen after come consolidation...given the likelihood of further bad news to come," said SG currency strategist Phyllis Papadavid.
The euro rose 0.8 percent against the dollar to $1.2583, clawing back from the two-week low of $1.2389 it had set earlier in the global session. The single currency's gains were partly driven by its rise to a record high against sterling. Sterling was down 0.5 percent at $1.4846, having earlier fallen to a 6-1/2 year low at $1.4807.
Risk aversion was heightened after the US Treasury backed away on Wednesday from using its $700 billion financial bailout to buy bad mortgages, raising fears that banks would have trouble shoring up their financial health.
"Investor sentiment has been hit by fears banks will not be able to weather the financial storm without being able to offload their troubled assets from their books," RBC Capital analysts said in a research note. "Policy u-turns in this environment do not exactly breed confidence.
The single currency also rose 2 percent to 120.75 yen. Earlier in the global session it briefly fell as low as 117.65 yen, the lowest since October 28. The dollar recovered from the day's low of 94.53 yen to 96.00 yen, up 1 percent on the day. Asia-based traders said short-term speculators who bought the yen from around 97 yen sold the Japanese currency back to book profits.
Wariness of risk also battered the Australian dollar, which fell to a two-week low of $0.6348 in late New York trade the previous day, forcing the Australian central bank to intervene to support the currency early on Thursday.
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