LONDON (Reuters) - The dollar rose against most major currencies on Friday as global share prices bumped lower on fears about a possible recession, keeping investors risk averse which also boosted the yen.
Stocks took little joy in an interest rate cut by the Bank of Japan, following similar moves by central banks including in the United States and China this week seeking to limit the economic damage inflicted by the credit crisis.
European shares stumbled one percent after Japan's Nikkei stocks average .N225 shed five percent on Friday as investors were unconvinced that a 20 basis point rate cut by the BOJ would do much to stop the economy slowing.
Recession fears and the credit crisis have driven down share prices. The Nikkei posted a 24 percent fall this month -- its biggest ever -- while European shares were also en route to their worst month on record.
Analysts said weak stocks were slamming high-yielding currencies as investors spurned the carry trade, where they borrow low-yielding currencies like the yen to pick up higher-yielding assets.
"Foreign exchange markets remain very jittery. Once again, the strongest performers in the last 24 hours have been the dollar, Swiss franc and most of all, the yen," said Tom Levinson, forex strategist at ING.
"So it's still very much a case of safe-haven, low-yielding currencies performing more strongly."
A sharp deterioration in the global economy is keeping expectations high that both the European Central Bank and the Bank of England will cut rates next week by 50 basis points.
Figures on Friday showing a fall in euro zone inflation boosted the argument for a rate cut by the ECB, which until recently had been wary of loosening policy because of global price pressures.
At 1128 GMT, the euro was down one percent at $1.2769, while it fell 1.9 percent against the yen to 124.95 yen. The dollar was down 0.8 percent at 97.81 yen.
Despite the dollar's losses against the yen, analysts said it would be supported, especially against the euro, by funds who need the U.S. currency for month-end window dressing purposes.
"Volatility is the watchword today," said Adam Cole, global head of currency strategy at RBS Capital Markets in London. "Large flows for hedging and rebalancing at the month end when the market is thin will likely prompt high volatility."
Other market participants said that the euro's sharp drop following a climb to around $1.33 on Thursday suggested that very few traders were comfortable taking outright short positions in the dollar.
Sterling was down around 1.3 percent against the dollar, but off session lows on news that UK banking giant Barclays PLC (BARC.L: Quote, Profile, Research, Stock Buzz) secured $12 billion in new capital.
BIG CURRENCY MOVES
Currencies have taken a roller-coaster ride in October as investors were forced to liquidate assets, prompting flows back into the dollar and yen and drastically cranking up volatility.
The yen struck a 13-year peak against the dollar and a six-year peak against the euro this month, jumping roughly 15 percent on a trade-weighted basis. .IBOXXFXJPY
Euro/dollar was down nearly 10 percent for October, on track to a record monthly decline.
The dollar/yen is down 8.5 pct on the month so far, en route to clock its biggest loss in 10 years, and sterling/dollar is nearly nine percent weaker from the start of the month, the biggest loss since October 1992.
In a widely flagged move, the BOJ cut the benchmark overnight call rate for the first time in seven years, although the 20 basis point cut to 0.30 percent fell short of expectations for 25 basis points.
After the rate decision, BOJ Governor Masaaki Shirakawa said the recent yen rise was affecting the economy, while Japanese Finance Minister Shoichi Nakagawa said on Friday the ministry had the means to intervene in the currency market, but would not say if or when it would.
Earlier this week, Group of Seven finance ministers and central bank governors singled out the excessive volatility of the yen and said they were concerned about its implications for economic and financial stability.
Data on Friday showed Japan had not intervened in the currency markets during the period of Sept 29-Oct 29.
(Additional reporting by Tamawa Kadoya; Editing by Ruth Pitchford)
