June 27, 2008 / 8:18 PM / 11 years ago

Yen and Swiss franc gain as risk appetite fades

NEW YORK (Reuters) - The yen and Swiss franc rose to three-week highs against the dollar on Friday as investors pared back risk exposure amid record high oil prices, slumping stocks and worries about U.S. economic growth.

The euro, meanwhile, headed for its second straight week of gains against the greenback as tepid U.S. economic data undermined the case for the Federal Reserve to hike interest rates by August.

With oil prices hitting a record near $143 and up more than 47 percent so far this year, the combination of sluggish growth and high prices has battered U.S. stocks, sent bond yields lower and put pressure on the dollar.

The drop in the Dow Jones industrial average, in particular, has pushed it more than 20 percent below its October 2007 peak, a decline that Wall Street calls a bear market.

“We’re back on the brink,” said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.

“It seems there is a feeling of resignation and helplessness amid this credit crisis and the negative consumer outlook. That has weighed on the dollar,” he added.

Low-yielding currencies such as the yen did well on Friday as losses in global equity markets dulled risk appetite. The dollar fell to 105.87 yen, a three-week low, before edging up to 106.13, down 0.6 percent on the day.

The euro shed 0.4 percent to 167.58, a sharp slide from a record high of 169.45 yen touched on Thursday.

The dollar hit its lowest level against the Swiss franc since June 9 at 1.0167 francs before rebounding to 1.0176 francs, still down 0.6 percent on the day.

The franc also rose after Russia’s central bank said it plans to increase the Swiss currency’s share in its $558.7 billion gold and foreign exchange reserves.

The euro rose 0.2 percent against the dollar to 1.5787 but was up nearly 1 percent on the week, on track for its second consecutive week of gains.

“We are potentially looking at a phase of dollar weakness similar to what we saw in February and March because of risk aversion and runaway commodity prices,” said Dolan.

FED STEADY, ECB LOOKS SET TO HIKE

Data showing U.S. consumer sentiment fell in June added to the gloom surrounding the greenback, as did fear of further credit losses that weighed on U.S. stocks.

Separate data, though, showed U.S. consumer spending jumped last month as tax rebate checks boosted household budgets, while core inflation, which strips out energy and food, eased.

The Fed left interest rates on hold at 2 percent on Wednesday, and while it said inflation risks have increased, it did nothing to convince markets of an imminent rate hike.

The European Central Bank, by contrast, has all but assured markets that it will raise its refinancing rate from 4 to 4.25 percent to rein in rising prices when it meets next week.

Inflation remains a top concern across the 15-country euro zone: Spanish consumer price inflation hit a record high of 5.1 percent in June, while inflation rose in five German states.

Deutsche Bank currency strategist Binky Chadha said in a research note that the U.S. and euro zone economies have seen similar gains in inflation and inflation expectations.

“But underlying labor cost trends have diverged markedly, falling in the U.S. and rising in the euro area, which should keep the ECB hawkish even as growth slows,” he wrote.

Paresh Upadhyaya, portfolio manager at Putnam Investments in Boston, said slower growth in the euro zone means the euro is unlikely to retest all-time highs above $1.60 without a “large deterioration in the U.S. economic outlook that pushes U.S. yields lower.”

“Weak U.S. fundamentals will prevent a euro sell-off, while at the same time, euro strength will be hindered by the potentially weaker euro zone growth,” he said.

Additional reporting by Steven C. Johnson; Editing by Jonathan Oatis

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