TOKYO (Reuters) - The dollar gained on Thursday as growing fears the global economy is headed for a deep recession sent investors rushing out of risky assets.
Stock markets had briefly rebounded after the United States and Europe launched sweeping plans to bail out the battered banking sector, but investor attention has quickly shifted to the fast-deteriorating economic outlook.
Wall Street suffered its worst day since the 1987 market crash on Wednesday after data showing U.S. retail sales fell much more than expected in September and Federal Reserve Chairman Ben Bernanke said the U.S. economy faced a "significant threat" from the credit crisis.
Japan's Nikkei share average plunged 10.4 percent following the tumble on Wall Street.
The dollar gained as investors sold higher-yielding currencies and unwound carry trades.
"The dollar is being bought as a safe haven as the financial sector concerns make their way around the world and weaken other key currencies such as the euro and sterling," said a trader at a Japanese trust bank.
The euro fell 0.5 percent to $1.3389 edging back toward a 1- year low of $1.3258 hit on trading platform EBS on Friday.
The dollar index, which measures the dollar's value against a basket of major currencies, rose 0.4 percent to 82.602, edging back toward Friday's 83.191 peak, which was the highest since June 2007.
A sell-off in emerging currencies from Hungary to South Africa, countries seen as increasingly vulnerable due to their large external debts, has benefited the dollar.
Highlighting the woes gripping emerging currencies, the South African rand plummeted over 17 percent against the dollar on Wednesday.
The greenback's overall strength helped it edge up against the yen.
Market players said Japanese investors were also motivated to sell the yen after it advanced beyond the 100 yen threshold against the dollar late on Wednesday.
"Profit-taking demand from Japanese institutions is quite strong at these levels," said the trader at the Japanese trust bank.
The dollar rose 0.6 percent to 100.23 yen pulling away from a six-month low of 97.91 yen hit on EBS on Friday.
The yen retreated despite the Nikkei's plunge, due to short- covering in higher-yielding currencies, market players said.
But there were doubts about whether the yen's weakness would persist, given the overall decline in risk appetite.
"It's hard to take risks, and position unwinding by hedge funds could continue," said Masafumi Yamamoto, head of FX strategy for Japan at the Royal Bank of Scotland.
In this environment, risk assets such as equities and commodities could stay under pressure, while the yen may have room to rise, he said.
The yen has surged through the credit crisis as market players have unwound long-standing carry trades and on speculation that Japanese investors have begun repatriating funds from their heavy investments abroad.
The high-yielding Australian dollar jumped 2.6 percent to $0.6681 Traders attributed the move to the covering of short positions by market players built up during the currency's tumble to a five-year low last week.
(Additional reporting by Masayuki Kitano, Eric Burroughs and Rika Otsuka; Editing by Michael Watson)
