October 31, 2008 / 8:37 PM / 11 years ago

FOREX-Dollar records biggest monthly gain in 17 years

* Dollar broadly firmer; yen up on risk aversion

* Gloomy U.S. data further fans recession fears

* Month-end rebalancing flows underpin dollar (Updates prices, adds quotes, changes byline)

By Wanfeng Zhou

NEW YORK, Oct 31 (Reuters) - The U.S. dollar recorded its biggest monthly gain against a basket of currencies in more than 17 years on Friday, boosted by month-end demand and concerns about a deteriorating global economy.

The yen pared most of its gains against the dollar, but traded sharply higher against the euro as investors remained averse to risk after bleak U.S. economic reports heightened global recession fears.

The strength in the dollar and the yen came despite higher U.S. equity prices on Friday. In recent weeks, rising stocks have typically indicated improving risk appetite, weighing on the U.S. and Japanese currencies.

“Heading into the New York session, we did see the dollar strengthen partly because the Japanese equity market, for example, didn’t react very favorably to the interest rate cut that we saw from the Bank of Japan,” said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.

“It’s still too early to sound the all-clear as far as the financial difficulties are concerned and for that reason as well, (the FX market is) possibly not fully embracing the gains that we’re seeing in the equity market. We’re being at least a little wary of it,” he added.

In late New York trading, the ICE Futures’ dollar index, a gauge of the greenback’s value against a basket of six other major currencies, rose 1.1 percent to 85.757 .DXY. The index rose nearly 8.0 percent in October, its best monthly gain since March 1991.

The euro was down 1.3 percent against the dollar at $1.2752 EUR=. It was down about 9.6 percent in October, the euro's worst monthly performance since its launch in 1999.

The euro fell 1.3 percent against the yen to 125.52 yen EURJPY=, while the dollar JPY= traded down 0.1 percent at 98.49.

Financial markets took little comfort from the Bank of Japan’s interest rate cut, the latest monetary policy initiative after central banks in the United States and other countries lowered rates this week to support growth. Investors were unconvinced a 20 basis-point rate cut by the BoJ would do much to avoid a slowdown in the Japanese economy.

One hundred basis points equals one percentage point.

RECESSION WORRIES

Data showing a steep drop in business activity in the U.S. Midwest and a record decline in consumer confidence this month reinforced worries about a recession around the world, which bolstered the dollar even though the reports came out of the United States.

“The Chicago PMI (Institute for Supply Management-Chicago) hints at deeper-than-normal recession,” said Dustin Reid, senior FX strategist at RBS Global Banking and Markets in Chicago.

“The concern here is that as firms’ margins get squeezed even more, so do profits, and equities could continue to grind lower. Although not great for the domestic economic outlook, if recent historical patterns persist, it should work towards the benefit of the dollar,” he added.

Month-end demand from global fund managers seeking to rebalance foreign exchange hedges in their portfolios also helped boost the U.S. currency during most of the session, some analysts said.

The yen, meanwhile, strengthened despite the BoJ rate cut, as risk aversion, which tends to favor the yen, took hold.

The Japanese currency was up 7.1 percent versus the dollar on the month, its biggest gain in more than 8 years. It struck a 13-year peak against the dollar and a 6-1/2-year peak against the euro this month, jumping roughly 15 percent on a trade-weighted basis. .IBOXXFXJPY.

Other big currency moves included sterling’s 9.7 percent fall versus the dollar this month, its largest monthly decline in 16 years. (Additional reporting by Gertrude Chavez-Dreyfuss; Editing by James Dalgleish)

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