The euro and higher-yielding currencies gained at the expense of the dollar and yen on Friday as share prices rose, buoyed by optimism after the US government pledged fresh financial aid for Bank of America. Risk aversion calmed as Wall Street stocks snapped a six-day losing streak to end modestly higher on Thursday.
Tokyo shares followed the move, closing up 2.5 percent, while European shares were up more than 3 percent by midday and 10-year European government bond yields pulled away from historic lows. Officials said BoA will get $20 billion of capital and almost $100 billion of its potential losses will be guaranteed.
Those measures along with the prospect of another bank lending package in Britain eased investor concerns, also boosting higher-yielding currencies such as the Australian and New Zealand dollars. "The fact that we are now seeing the US and even UK authorities looking at further help for the financial and banking system have provided some relief," BNP Paribas senior currency strategist Ian Stannard said.
The dollar fell 0.8 percent on the day against a basket of currencies to 83.754. The euro rose 1.8 percent to 120.30 yen, just off a session high at 120.74 and bouncing further from a six-week low of 116.24 yen hit the previous day on trading platform EBS.
The single currency gained 0.8 percent to $1.3259, staying above a five-week low of $1.3025 hit on Thursday after the European Central Bank cut rates by a half percentage point to 2 percent, matching its record low. But worries about the banking sector were not far from investors' minds, as Citigroup and Bank of America both reported a fourth quarter loss. Citigroup also said it would split into two operating units.
Meanwhile, Ireland nationalised its third largest lender, Anglo Irish Bank. The aid for Bank of America followed the US Senate's decision to allow the second half of a $700 billion bank bailout programme, handing an early political victory to President-elect Barack Obama, who will be sworn in next Tuesday.
Earlier, Democratic leaders in the House of Representatives unveiled an $825 billion tax cut and spending bills they hope will help Obama reverse the economic slump, offsetting fears of soaring losses at the top three US banks. The dollar gained 0.9 percent to 90.58 yen, while the Australian and New Zealand dollars gained 1.8 percent and 1.7 percent versus the US unit respectively. Sterling surged, rising 1.8 percent to $1.4924.
Despite the optimism, investors also remained wary as the outlook for the global economy remained glum. Data on Friday is expected to show US consumer prices falling 0.2 percent in December from the same period a year ago, which if realised would be the first negative reading since the 1950s, analysts say. Core consumer prices, which exclude volatile food and energy prices, are seen rising 1.9 percent year-on-year. Some analysts say that could further dampen the dollar.
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