NEW YORK (Reuters) - The dollar fell against the yen on Friday as investors worried that the credit crisis that has fractured the U.S. financial sector was far from over, pushing stocks lower.
The drop in U.S. shares and concerns that the credit crunch would make the funding of current account deficits difficult took some edge off the British pound and the New Zealand and Australian dollars.
“It’s very difficult, even when equities begin to rally, for investors to sell the yen aggressively, considering that at any time you could have (U.S.) banks come out with massive losses,” said Mark Meadows, a currency analyst at Tempus Consulting in Washington. “The risk is just too much right now.”
The dollar fell to a session low of 99.110 yen. It was last trading at 99.250 yen, down 0.4 percent on the day, with U.S. stocks ending down as credit-related worries sank financial shares.
Adding to investor concerns about the U.S. financial sector, Oppenheimer & Co analyst Meredith Whitney says Citigroup Inc (C.N), Wachovia Corp WB.N and other U.S. banks are likely to announce dividend cuts in April because their earnings will not support currently scheduled payouts.
Hawkish comments from European Central Bank Governing Council member Axel Weber and news that German consumer price inflation unexpectedly accelerated in March further diminished hopes for ECB interest rate cuts in the near term, keeping the euro supported.
The euro was last up 0.1 percent at $1.5800 within striking distance of last week’s historic peak at $1.5904.
The dollar rose against the pound and the New Zealand and Australian dollars on declining U.S. shares and worries that the credit squeeze might make the funding of current account deficits a challenge.
Sterling fell 0.7 percent to $1.9933 while the New Zealand dollar dropped 0.8 percent to US$0.7961. The Australian dollar dipped 0.2 percent to US$0.9172.
“The high-yielders are underperforming; maybe the market is starting to look back at the issue of risk. It’s notable that the riskier currencies in terms of the current account deficits are underperforming today,” said Shaun Osborne, chief currency strategist at TD Securities in Toronto.
“We are looking for a significant current account deficit position in the UK,” Osborne said.
Analysts said that, while the euro had seen a mild bout of profit-taking, investors were reluctant to aggressively sell the single currency ahead of Federal Reserve Chairman Ben Bernanke’s testimony before Congress and March’s nonfarm payrolls report, both next week.
With gains of more than 8 percent since the start of the year, the euro is still on track for its best quarterly performance since late 2004, and analysts say further gains toward $1.60 could well occur.
“There are lots of hurdles for the dollar next week. The one saving grace for the dollar would be if European data disappoints. At this point, it’s very difficult to bet against the euro,” said Omer Esiner, foreign exchange analyst at Ruesch International in Washington.
Reports showing a small increase in consumer spending, tame inflation pressure and a drop in U.S. consumer confidence boosted the view that the Fed will cut interest rates further to stimulate the weakening economy.
The diverging interest rate paths and signs that the euro zone — at least for now — appears to be weathering the U.S.-led economic slowdown helped push the euro to record highs last week.
Additional reporting by Gertrude Chavez-Dreyfuss