SAN FRANCISCO (MarketWatch) -- The dollar retreated against its Japanese counterpart Thursday as the carnage on Wall Street curdled investors' risk appetite, but it gained against the euro and pound.
The dollar index was at 81.397, up from 81.311 earlier Thursday and from 80.879 in late North American trading Wednesday.
The dollar was buying 99.46 yen, compared to 100.32 yen late Wednesday.
The euro was buying $1.3594, down from $1.3672 late Wednesday.
The pound was down over 1% at $1.7077 after dropping to $1.7060 earlier, an almost three-year low.
The dollar rose to its highest level in a year and a half against its Canadian counterpart. It was last buying
U.S. stocks dramatically extended losses late in the session. One year to the day after climbing to its peak of 14,164.53, the Dow Jones Industrial Average sank 678.91 points, its third-largest point loss on record, to finish at 8,579.19, pushing the blue-chip index under the 9,000 level for the first time since August 2003. See Market Snapshot.
"A late day stock melt down...took dollar-yen under 100.00, and weighed on [the] euro-dollar, " wrote currency analysts at Action Economics.
The stock market's continued decline comes one day after the U.S. Federal Reserve, European Central Bank, Bank of England and other central banks made coordinated interest rate cuts.
The Treasury Department is now considering a plan to take ownership stakes in many U.S. banks, both healthy and troubled. Treasury Secretary Henry Paulson said in a speech Wednesday that he has the authority to do so under the $700 billion bailout plan. See full story.
"In theory this announcement should give banks the peace of mind to start lending as a direct capital injection from the U.S. government should reduce the risk of counterparty failure," wrote Kathy Lien, director of currency research at GFT.
But she said the news did little to calm rising tensions.
"The Treasury would not start taking equity stakes until the end of the month while the $700 billion bailout plan has yet to be up and running. The market wants a fix now and not three weeks later. Between now and the end of the month, liquidity could evaporate," Lien said in a note to clients.
On the U.S. data front, the Labor Department reported a decline in weekly jobless claims, which fell by 20,000 to 478,000 last week. Read Economic Report.
Adding to the greenback's upward momentum was a drop in dollar denominated commodities prices.
Gold ended down, with the contract for December delivery dropping $20 to $886.50 an ounce on the New York Mercantile Exchange. Read Metals Stocks.
Oil futures for November delivery fell $2.36 to $86.59 a barrel, their lowest closing level so far this year. See Futures Movers.
Overseas, trading in the Icelandic krona froze after the country nationalized its largest bank, Kaupthing, meaning all three of its key banks are now under government control. Read more.
The dollar firmed against the Japanese currency overnight, but strategists warned that ongoing uncertainty over the fate of the financial sector would likely maintain support for the yen, which tends to post sharp gains during periods of mounting risk aversion.
That also spells trouble for traditionally high-yielding currencies, such as the Australian and New Zealand dollars, which once benefited from carry-trade strategies, they said.
"Although the Australian dollar's massive losses can be seen as overdone, the currency will not be able to recover meaningfully so long as the market uncertainty remains acute; the same holds true" for the New Zealand dollar, said strategists at Commerzbank.
