By William L. Watts, Nick Godt & Lisa Twaronite, MarketWatch
SAN FRANCISCO (MarketWatch) -- The U.S. dollar extended gains on most rivals Wednesday, with the notable exception of the yen, in a recently familiar pattern of rising risk aversion.
Another day of sharp declines on Wall Street vanquished risk appetite, to the benefit of the dollar and the yen. All three indexes closed with losses over 7.0%, and the Dow industrials marked their second-biggest point drop ever. See U.S. Market Snapshot.
The dollar "strengthened on the day as market pressures returned with a vengeance, despite all the efforts this past week to alleviate them," wrote currency strategists at Brown Brothers Harriman in New York.
The dollar index , which measures the greenback against a basket of six major currencies, was at 82.281, up from 81.551 in late North American trading Tuesday.
The dollar was higher against the euro, with the currency dipping to $1.3466, down from $1.3624 late Tuesday.
But the dollar eased against the Japanese unit, slipping below the 100-yen level in afternoon trading. It was buying 99.88 yen, down from 102.15 in North American trading late Tuesday.
"The yen is showing its risk barometer colors again," wrote currency analysts at Action Economics.
Stock losses accelerated after the latest Beige Book report on U.S. economic activity released Wednesday by the Federal Reserve showed a broad slowdown in economic activity was underway by the end of September.
Consumer spending was down in most regions. Factory activity was also slow. Even more worrisome was the downturn in "nonfinancial services," which has been the backbone of economic activity. Read The Fed.
Earlier Wednesday, the dollar came under pressure after reports showing retail sales fell the most in three years in September, while a New York manufacturing index plunged in October.
More difficulties lie ahead for the economy, but the U.S. is in better position to get through them now that the government has new powers to strengthen the banking sector, Federal Reserve Board Chairman Ben Bernanke told Wall Street Wednesday.
"Although much work remains and more difficulties surely lie ahead, I remain confident that the American economy, with its great intrinsic vitality and aided by measures now available, will emerge from this period with renewed vigour," Bernanke said in a speech to the Economic Club of New York. Read The Fed.
In Europe, consumer inflation across the 15-nation euro zone slowed to a 3.6% annual pace in September, statistical agency Eurostat reported. This was down from a 3.8% rate seen in August.
The figure matched an earlier, preliminary estimate, gave investors greater assurance that once-surging inflation in the region has likely peaked, said economists at UniCredit.
Stocks call tune
Stock markets have been calling the tune in foreign exchange trading in recent sessions. Strong rebounds for equities Monday and early Tuesday left the yen, which had cemented its role as the ultimate risk-aversion currency, under pressure.
The dollar also weakened early in the week, with the euro and the British pound gaining ground as European governments took the lead in implementing a massive banking-sector recapitalization program as well as other steps designed to revive credit markets.
But weakness returned to equities late Tuesday, with U.S. stocks slipping lower by the end of the session as investors discounted Washington formally moving to spend up to $250 billion to purchase equity stakes in the nation's biggest banks as a means of prodding them to begin lending again. The gloom carried over into Wednesday's session.
