Dollar, yen up with U.S. recession fears at forefront

A picture illustration shows U.S. one dollar bank notes and a one Euro coin, taken in Warsaw January 26, 2011.

NEW YORK (Reuters) - The dollar and Japanese yen rose broadly on Thursday as investors stampeded into safe-haven currencies on signs of a weakening U.S. economy and concerns over European banks' exposure to euro zone debt.

A deluge of dismal U.S. economic data and euro zone fears rattled financial markets, with global stock markets tumbling while spot gold prices and Treasury bonds rallied on fears the United States economy may slide back into recession.

"Indeed, for the moment it is hard to see the markets breaking decisively the spell of uncertainty created by global growth fears, constrained monetary and fiscal policy choices, and the lingering European debt crisis," said Vassili Serebriakov, currency strategist at Wells Fargo in New York.

In late afternoon New York trade, the euro was down 0.6 percent at $1.4338.

"The Swiss franc is bucking the positive trend among the safe-haven currencies on fears of new steps to curb currency strength by the Swiss National Bank," Serebriakov added.

The greenback rose 0.3 percent against the franc at 0.7932 franc, though the euro was 0.3 percent lower to 1.1376 francs.

Both the euro and dollar initially gained on talk of Swiss National Bank intervention in the forwards market. The SNB declined comment.

Forward market intervention involves selling Swiss francs in short-dated maturities to flood the market with the currency, then buying them back or rolling them over at a later date.

Traders said by undertaking franc selling in the forwards instead of in the spot market, the SNB was seeking to drive the return on holding francs even lower, making it less attractive to potential investors.

"The SNB's gradualist intervention strategy, which leaves some unused bullets in the bag, has contributed to some choppy action in the Swiss franc, although the traditional haven will remain favored during periods of extreme risk aversion," Brown Brothers Harriman said.

Meanwhile, the U.S. Federal Reserve provided $200 million of liquidity to the Swiss National Bank in the latest week via its swap lines for foreign central banks, the New York Fed said on Thursday.

Market sentiment on Thursday was buffeted by data from the Philadelphia Federal Reserve Bank showing that factory activity in the U.S. Mid-Atlantic region plunged to an almost 2-1/2-year low in August.

"Today was not a good day for weak Philly Fed data to be coming out as the market is trading more on emotions than value," said Ken Dickson, investment director for currencies at Standard Life Investments, with assets under management of more than $250 billion.

That said, Dickson, based in Edinburgh, thinks the global economy will not slide into recession as many seem to expect. "We think global growth will be soft, particularly in the developed markets, but we don't think the global economy will be moving into the double-dip area or an extended recession."

He said that in the medium to long term, Standard Life remains bullish on the dollar, as well as sterling -- currencies that have struggled as the countries' fiscal deficits have come into focus.

"The market has taken them to levels that make them undervalued with market positioning also very low on these currencies," Dickson said.

A Wall Street Journal report overnight saying that the Federal Reserve is scrutinizing European banks in the United States also dented risk appetite. The president of the New York Federal Reserve later said the Fed is treating foreign banks the same as their U.S. peers.

Against the yen, the dollar was flat at 76.58 yen, not far from its record low of 76.25 yen struck in March of this year.

(Additional reporting by Gertrude Chavez-Dreyfuss and Wanfeng Zhou; Editing by Leslie Adler)