The yen fell broadly on Friday and high-yielders gained after comments by Federal Reserve Chairman Ben Bernanke cemented expectations of easier monetary policy, which may help the US economy to avoid a recession.
The prospect of interest rate cuts eased concerns about a slowdown in global growth, boosting the high-yielding currencies of Australia and New Zealand and also giving some support to the US dollar.
Reports that the US government and financial institutions are discussing a plan to renegotiate adjustable rate mortgages also helped sentiment. They suggested that moves are afoot to clean up the subprime mortgage mess that has rocked global financial markets.
In remarks to the Charlotte Chamber of Commerce on Thursday, Fed chief Bernanke said a resurgence in financial strains in recent weeks had dimmed the outlook for the US economy, signalling an openness to lower rates again.
These added to comments from Fed Vice Chairman Donald Kohn on Wednesday - that renewed financial market turmoil could slow the US economy more abruptly than thought - boosting expectations of a Fed rate cut next month, with more to come in 2008.
The prospect of lower rates lifted sentiment in equity markets with shares in the US, Asia and Europe all rallying leading investors to sell the yen in favour of higher yielding, riskier assets. "There is a tight link between how the equity market is performing and how the yen tends to do," said Phyllis Papadavid, currency strategist at Societe Generale.
"Now that risk appetite seems to have stabilised, it's unsurprising that high yielders are doing better and the yen is down." By 1139 GMT, the dollar was up 0.75 percent at 110.65 yen, recovering from a 2-1/2-year low of 107.20 yen hit a week ago according to Reuters data.
The euro was up almost 1 percent at 163.43 yen. High yielders such as the Australian dollar and the New Zealand dollar also rose versus the yen and the US currency. The euro was up 0.2 percent versus the dollar at $1.4768, having been given a small boost by higher than expected eurozone November inflation data backing the case that the European Central Bank will not cut rates.
The UBS FX risk index fell to 1.97, showing risk aversion at a two-week low thanks to decreasing cross market volatility. The dollar index, a gauge of its performance against six major currencies, was steady at 75.556, holding above a record low hit last week.
Traders reported that thin liquidity was leading to relatively sharp moves in the FX market. Although investor focus has shifted to slowing growth from rising inflation, October core US personal consumption expenditure (PCE) data - the Fed's favourite inflation measure - may attract attention at 1330 GMT.
Analysts think that inflation is broadly under control, which gives leeway for the Fed to cut interest rates further. "Overall, we continue to view inflation pressures as roughly balanced and see the current level of the core as only moderately higher than the Fed would prefer," said Lehman Brothers in a note to clients.