LONDON (MarketWatch) -- Currency markets continued to take their cue from equities Monday, with the dollar and yen retreating against most major counterparts as rebound in risk appetite provided modest support for Asian and European stocks.
"Movements in equity and commodity markets have been fairly pivotal in how currencies have traded in October and could again be instrumental this week if BOE (Bank of England) and ECB (European Central Bank) rate decisions go as forecast," wrote strategists at Lloyds TSB.
The Bank of England is expected to cut its key lending rate by at least a half-point to 4% on Thursday, with a growing number of economists penciling in an unprecedented cut of a full percentage point to 3.5%.
The ECB is also widely expected to cuts its key lending rate, which stands at 3.75%, when its rate-setting Governing Council meets Thursday.
Meanwhile, "the threat of further fund redemptions and a worsening U.S. labor market could destabilize stocks and help the yen to consolidate gains, despite the [Bank of Japan] rate cut last Friday," they said.
The Japanese yen posted sharp gains across the board in October, as traders abandoned once-popular carry trades amid mounting turmoil in world financial markets.
Carry trades center on borrowing in the yen and other low-yielding currencies and then buying assets denominated in higher-yielding currencies.
The dollar, to a lesser degree, also soared in October. The greenback was boosted as traders fled emerging and other overseas markets, as well as some safe-haven buying amid global economic and market turmoil.
"We do not expect global recession fears to wane considerably," the UniCredit strategists said in a research note.
That means the yen should remain supported over the medium term, meaning that tests of the 105 yen level versus the euro and the 88 level against the dollar can't be ruled out, they said.
The dollar index , a measure of the greenback against a trade-weighted basket of six currencies, fell to 85.182 from 85.834 in late North American trading Friday.
The euro rose to $1.2836 from $1.2751. The euro lost more than 9% against the dollar in October.
The Markit purchasing managers index for the euro-zone manufacturing sector fell to 41.1 from 45.0 in September. That's below a preliminary reading of 41.3. A figure of less than 50 indicates a contraction in activity, while a reading of more than 50 signals expansion
The dollar bought 99.23 yen, up from 98.67 yen late Friday. The dollar fell more than 7% against the yen last month.
The euro rose to 127.38 yen, up from 125.79 yen late Friday after losing around 16% against the yen in October.
The British pound posted a strong rise to $1.6204 against the greenback, up from $1.6069 late Thursday - after dropping around 9% in October.
A full-point rate cut by the Bank of England "is almost priced in and we would not trade currencies from a rate-differential, but from a risk-appetite point of view," said strategists at BNP Paribas.
That leaves room for the pound to continue rising in line with rebounding equity and commodity markets, they said.
Sterling had little reaction to an unexpected rebound in the purchasing managers index for the British manufacturing sector.
The CIPS/Market purchasing managers index for the U.K. manufacturing sector rose to 41.5, up slightly from the record low of 41.2 in September.
Economists had expected PMI to fall to 40.
