The yen rose broadly on Friday after a fall in quarterly earnings for industrial conglomerate General Electric stoked fears about the health of the US economy, causing investors to dump riskier trades. US stock indexes fell more than 2 percent on Friday, dragging the dollar lower against the low-yielding Japanese yen and Swiss franc.
Investors regard the stock market as a barometer for risk appetite. Analysts said news that General Electric Co, the second-largest US company by market capitalisation, reported a 6 percent drop in profits, along with data showing US consumer morale plunged to a 26-year low in April, pointed to a deeper malaise for the world's economic powerhouse.
"There has been so much complacency stemming from the notion that systemic risk has diminished just because we are not seeing any high-profile rescue operations such as Bear Stearns," said Ashraf Laidi, chief FX strategist at CMC Markets in New York. "People have an erroneous sense of comfort and it is absolutely ridiculous to think the worst is behind us."
A collapse of Bear Stearns, then the fifth-biggest US investment bank, was averted last month when the Federal Reserve stepped in and helped arrange its sale to J.P. Morgan Chase & Co. "GE is a good proxy for the US economy. The weakness in GE (profits) has raised concerns over the weakness of the US economy. That put some pressure on the dollar," said Ronald Simpson, director of FX research at Action Economics in Tampa, Florida.
"The biggest loser has been dollar/yen because it is significantly correlated to the US equity market's performance." The dollar dropped to a session low of 100.66 yen and was last trading at 100.76 yen, down 1 percent on the day. The euro fell 0.5 percent to 159.53 yen.
The euro closed in on this week's record high, supported in part by speculation that top financial officials from the Group of Seven rich nations may not make a co-ordinated effort to talk up the dollar when they meet later in the day. "Ahead of the G7 meeting, it's a bit of a wait-and-see approach in regards to the euro," said Matthew Strauss, a senior currency strategist at RBC Capital in Toronto. "Foreign exchange is not the main focus of this meeting, but they may address the volatility in the market."
The euro's gains were capped as a report showing an unexpected jump in US import prices in March reminded investors about swelling inflationary pressures, which could limit the Fed's ability to continue cutting interest rates.
The euro was last up 0.5 percent at $1.5827 after rising to a session peak of $1.5855, not far from a record high of $1.5902 hit on Thursday, according to Reuters data. Analysts said the market was reluctant to drive the dollar too much lower ahead of the G7 communiqué, but many did not expect any change in the group's language on currencies.
The Japanese currency also rallied against the New Zealand and Australian dollars as concerns about the US economy encouraged investors to unwind carry trades, which are funded by borrowing in low-yielding currencies such as the yen and investing in currencies and assets offering higher returns.
The Swiss franc also benefited, with the dollar falling 0.7 percent to 1.0014 francs, while the euro slipped 0.2 percent to 1.5832 francs. Low-yielding currencies such as the yen and Swiss franc tend to attract flows during periods of uncertainty as the low interest rates reflect the capital surplus of their countries.