The dollar and yen weakened on Friday as fresh government aid for US banks eased some investor concerns about stress in the financial sector, reducing safe-haven flows into the US and Japanese currencies. News that Bank of America received $20 billion in new government capital boosted high-yielding currencies, such as the New Zealand dollar, and helped the euro rebound from a fall after Thursday's European Central Bank interest rate cut.
"The Bank of America recapitalisation was relatively good news for risk appetite. People were reassured a little by it," said Mark Frey, head of trading at Custom House, a global payments dealer in Victoria, British Columbia.
The euro rose 1 percent to $1.3290, rebounding from Thursday's five-week low at $1.3025, according to Reuters data, though it ended down about 1.3 percent on the week. Against the yen, the euro soared 1.8 percent to 120.24, while the dollar gained 0.9 percent to 90.58 yen. The dollar and yen, both saddled with interest rates near zero, tend to weaken as risk appetite rises because investors feel more confident about buying higher-yielding currencies and assets such as stocks and commodities.
The dollar also came under pressure after a government report showed investors sold US Treasury bonds in November for the first time since August 2007, when the credit crunch began. The New Zealand dollar rose 1.7 percent against the dollar to $0.5467 and 2.6 percent against the yen to 49.55 yen. At 5 percent, New Zealand's interest rate is highest among industrialised economies.
Sterling was last up 0.6 percent at $1.4744, though it retreated rapidly from a session peak of $1.4980 after shares of Barclays tumbled in late European trade on growing worries about UK banks' capital needs and outlook. Barclays later said its board knew of no justification for the slide in its stock price.
The aid for Bank of America followed the US Senate's vote to release the second half of a $700 billion bank bailout program, handing an early victory to President-elect Barack Obama, who will be sworn in on Tuesday.
Democratic leaders in the US House of Representatives unveiled an $825 billion tax cut and spending package they hope will help Obama reverse the economic slump. But analysts said Friday's more buoyant mood may prove fleeting, "because there are still a lot of downside risks for the economy and financial markets," said Terri Belkas, currency strategist at DailyFX.com in New York.
The travails of Bank of America and other large financial institutions suggest there could be more trouble to come, thus deepening an already severe world economic slump and sparking fresh losses in the financial sector.
"The prevailing view still is that we're not out of the woods, and you don't have to look any further than some of the corporate earnings results for confirmation," said Frey. Bank of America and Citigroup on Friday both reported multi-billion dollar losses in the fourth quarter and Citigroup said it would split into two operating units.
"Fears that we may see another round of risk aversion similar to October and November will put a floor under the US dollar," he said. The euro may prove a bit more resilient, some analysts said, because ECB President Jean-Claude Trichet this week dismissed the idea of cutting interest rates to zero as the United States and Japan have done.
"Essentially, there's going to be a floor on European rates, perhaps at 1 or 1.25 percent, which will leave the euro with a moderately higher yield than the dollar and yen," said Boris Schlossberg, director of currency research at GFT Forex in New York.