The yen and the dollar fell broadly on Friday, while perceived higher risk currencies such as the Australian dollar gained as improved US data fuelled hopes for a global economic recovery. Declines in the dollar against the euro were limited, however, with investors wary ahead of a US Federal Reserve policy meeting and another record batch of US debt to be auctioned next week.
A dearth of economic data on Friday meant position adjustments before the weekend may dominate trade, dealers said. Data on Thursday showed the number of people on US jobless benefits fell for the first time since January, and manufacturing in the US Mid-Atlantic region contracted much less than expected in June.
Adding weight to the recent optimism, International Monetary Fund First Deputy Managing Director John Lipsky on Friday pointed to signs the decline in global output has moderated and said the IMF is likely to revise up its 2010 growth forecasts.
This helped push European shares up 1.4 percent and oil prices back above $72 per barrel, bolstering the higher-yielding Australian dollar, which rose around 1 percent against the yen and the US dollar. "The market is gathering greater confidence in the world economy," Bank of New York Mellon currency strategist Neil Mellor said.
By 1200 GMT, the euro was up 0.4 percent against the yen to 134.84 yen and by 0.2 percent against the dollar to $1.3925. The dollar also rose 0.2 percent against the yen to 96.82 yen. The Australian dollar outperformed other majors, gaining 1 percent to 78.05 yen and 0.9 percent against its US counterpart to $0.8063.
The declines in the yen and the dollar were limited, however, with investors unconvinced the recent rally in riskier assets was justified given the global economy is still struggling to emerge from its worst recession in decades.
"The leading indicator data aren't enough to start an upward trend," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ. "The markets need to see more hard evidence to confirm the improvement that they expect."
Another record round of US Treasury debt auctions - some $104 billion worth will be offered next week - will be closely followed for signs of how investor demand is holding up in the face of an avalanche of government debt.
Markets will watch whether the Fed addresses a recent rise in short- and long-term interest rates, either by emphasising it will keep rates low for some time, or by saying it will extend its purchase of US Treasuries. An aggressive expansion of its buying is seen as unlikely. The Federal Reserve begins its two-day meeting on Tuesday, with a decision scheduled for Wednesday.
The Swiss franc remained under pressure, with the euro holding above the 1.51 franc level after traders on Thursday cited Swiss franc selling against the euro by the Swiss National Bank. Analysts and traders view 1.50 francs per euro as a key level, with the SNB seen unlikely to tolerate a move much below it, but they note that heavy downside pressure on the pair means the central bank will need to demonstrate its resolve.