The US dollar fell against the euro on Thursday as a strong performance on Wall Street helped ease extreme risk aversion, reducing demand for safety. Meanwhile, the yen tumbled against the dollar, the euro and higher-yielding currencies, reversing sharp gains in the previous session. Renewed speculation of intervention by Japanese authorities to stem the currency's rise added to pressure.
US stocks soared on Thursday after tumbling in the previous session, helped by a search for beaten-down shares. Currency traders have closely watched equity moves for direction in recent weeks. "The dollar has benefited lately from a flight-to-safety bid generated in part by high volatility in the US equity markets. The move today was reversed," said Gareth Sylvester, senior currency strategist at HiFX in San Francisco.
In late afternoon trading in New York, the euro was up 3 percent against the dollar at $1.2836, clawing back from the two-week low of $1.2389 hit earlier in the global session. The dollar was up 3 percent versus the Japanese yen at 97.60 yen. The yen plunged against the euro and the European currency last traded up 5.8 percent at 125.20 yen.
Risk aversion made the dollar briefly trim its losses after US government data showed initial jobless claims rose last week to the highest level since the weeks following the September 11, 2001 attacks. "We've already seen that Germany is in a recession. Tomorrow, we'll probably confirm that broader Europe is in a recession. All these are ironically dollar-positive developments given the dollar's safe-haven appeal," he added.
Analysts said the euro gains were also partly driven by its rise to a record high against sterling. Sterling was down 1 percent against the dollar at $1.4778, having earlier fallen to a 6-1/2 year low at $1.4559. The pound came under pressure after the Bank of England said on Wednesday that the British economy would shrink sharply next year, bolstering expectations of further rate cuts.
Despite Thursday's pullback, analysts expect the dollar and the yen to stay well-bid as persistent wariness over the global economic outlook will likely continue to drive investors away from risky assets and into the safety of the two currencies.
De-leveraging and unwinding forces will remain "intact," Marc Chandler, a senior currency strategist at Brown Brothers Harriman in New York said in a note. "This will serve to help keep the dollar and yen supported into the end of the year." Recession 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.
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. Risk aversion was heightened on Wednesday after the US Treasury backed away from using its $700 billion financial bailout to buy bad mortgages, adding to fears about the US and global economy.