The US dollar rose against the euro on Friday, while the yen gained in volatile trading, as financial distress and economic weakness beyond the United States persisted, giving the greenback a safe-haven bid. Weakness in the US stock market has once again supported the yen versus the dollar, euro and other high-yielding currencies as investors unwound trades funded using the Japanese unit's low rates.
Investors also fretted about data showing declines in US consumer sentiment and housing construction, which fuelled fear that the credit crisis had knocked the economy into recession. Trading was extremely choppy and liquidity was thin, though, with rapid rises and falls in the US stock market driving currency price moves.
Though governments worldwide have started pouring cash into troubled banks, helping reduce the cost of interbank borrowing, investors remain worried about the cost to the real economy from a credit crisis that has persisted for more than a year.
"The dollar continues to have a bid tone, because risk aversion and the deleveraging that's been going on are still alive," said Win Thin, senior currency strategist at Brown Brothers Harriman in New York. In late afternoon trading, the euro was down half a percent at $1.3422. The euro fell 0.5 percent to 136.29 yen.
The dollar was off its lows against the yen but remained down at 101.54 yen. Sterling fell 0.1 percent to $1.7299. When risk appetite fades, the dollar tends to benefit along with the yen, as dollar-based investors repatriate funds, seeking safety in US assets. That's a trend that may be hard to break if incoming economic data globally continues to deteriorate, analysts said.
On Friday, data showing US consumer confidence suffered its steepest monthly decline on record in October while new home construction last month hit a 17-1/2-year low followed reports detailing drops in retail sales and industrial output. Signs of trouble also emerged in economies in Eastern Europe and Asia, while investors expect slower euro zone growth to force the European Central Bank to cut interest rates again by year-end.
"I'd characterise recent US data as dismal, but no matter how bad things get here, the global picture looks just as bad," and that will support the dollar and the yen, said Omer Esiner, senior currency analyst at Ruesch International in Washington.
For the next couple of weeks, currency investors will continue to monitor developments in the credit and stock markets. Overnight borrowing costs for dollars, euros and sterling funds, reflected in London interbank offered rates, fell again on Friday. But analysts said the credit market is still a long way from a return to normalcy as longer-term lending rates remain high, which could be a drag on the global economy.
"Money and credit markets have improved in the wake of the recent barrage of policy measures, but equities have still been volatile," said CitiFX in a research note. "The interplay between these forces in driving sentiment will be far more important for short-term currency direction than underlying economic developments. In this light, progress on the implementation of recent policy initiatives will be closely watched." Still, anxiety remained high, stoked partly by news Ukraine and Hungary had turned to the International Monetary Fund and other foreign lenders to help bolster their financial systems.