Yen, dollar gain as U.S. consumer sentiment sours

By Steven C. Johnson

NEW YORK (Reuters) - The yen and dollar rose on Friday, with the Japanese currency headed for its best weekly gain against the greenback since October, amid fears of weak U.S. corporate profits and fading hopes for a global recovery.

A report showing U.S. consumer sentiment soured in July also boosted the two currencies, which gain when investors sell risky assets such as stocks and commodities and buy back the low-yielding dollars and yen used to finance those purchases.

The yen was the main beneficiary, hitting multi-month highs against several currencies this week, including the euro. The dollar hit a five-month low below 92 yen Wednesday and shed 4.5 percent on the week, its biggest weekly slide since October.

U.S. data "underlines the ongoing gloom facing the U.S. consumer and further delays prospects for a near-term recovery," said Brian Dolan, senior currency strategist at Forex.com, in Bedminster, New Jersey.

UBS strategist Brian Kim added that "earnings are still in the back of everyone's mind, and that increases uncertainty." A profit warning from Chevron Corp (CVX.N) boosted the specter of a weaker-than-expected second half recovery.

The dollar was last down 0.7 percent at 92.30 yen, after dipping to 91.80, according to Reuters data, just above a five-month. The euro lost 1 percent to trade at 128.98 yen.

Against other currencies, the dollar rose on safe-haven buying. An index that measures it against six major currencies rose 0.4 percent .DXY while the euro fell 0.4 percent to $1.3969. Sterling fell 0.8 percent to $1.6205.

The Swiss franc fell after Swiss National Bank chief Jean-Pierre Roth said the central bank would continue to fight deflation by preventing franc strength.

The dollar rose 0.5 percent to 1.0832 Swiss francs.

DOLLAR PROSPECTS, EUROPEAN BANK WORRIES

While the yen and dollar both do well when investors choose less risky assets, the yen outpaced its U.S. counterpart this week. Some analysts said that was partly because the dollar's status as global reserve currency came under scrutiny at the G8 meeting in Italy, although reaction was muted to Chinese calls for a review of the reserve currency system.

The dollar could be due to rise further. Analysts said data earlier this week showed that speculators have built up the largest position against the dollar since before the collapse of Lehman Brothers last autumn, which had sparked massive risk aversion and dollar demand.

Peter Frank, a Societe Generale strategist in London, said that may be suggest a shift back into dollars may be imminent as optimism about the global economy fades.

"Speculators are still positioned for risk appetite, but the market is going the other way," he said.

Meanwhile, lingering worries about the euro-zone banking sector kept the euro under pressure. Earlier this week, Germany's finance minister said the Bundesbank could be used to buy up corporate bonds to help loosen up credit markets.