LONDON (MarketWatch) -- Disappointing earnings outlooks from European banks overshadowed the impact of Democrat Barack Obama's historic U.S. presidential victory Wednesday, trimming risk appetite and lifting the Japanese yen and the U.S. dollar to modest gains.
"Barack Obama has been elected new president of the U.S.A., but the reaction on currency markets was muted," said Marcus Hettinger, currency strategist at Credit Suisse in Zurich.
Obama, a senator from Illinois, swept to an overwhelming victory in the Electoral College and led Republican rival and Arizona Sen. John McCain in the popular vote. See full story.
The dollar index , a measure of the greenback against a trade-weighted basket of six currencies, rose to 85.151 from 84.533 in North American trade late Tuesday.
The dollar retreated against the Japanese yen, slipping to 98.95 yen from 99.62 yen. The euro fell 1.5% against the Japanese unit to 127.38 yen.
European equities turned lower in early trading and remained on the defensive at midsession. See Europe Markets.
A warning by Allied Irish Banks on its earnings outlook and disappointing results from BNP Paribascontributed to the negative tone, said Kenneth Broux, a strategist at Lloyds TSB.
The yen has been the ultimate beneficiary of sharp spikes in risk aversion as traders have abandoned once-popular carry trades. Those strategies centered on borrowing in low-yielding currencies, such as the yen, and buying assets denominated in higher-yielding currencies.
De-leveraging and liquidation have proved supportive to the dollar over the same period as U.S. investors abandoned emerging markets and other foreign investments. Safe-haven buying also served to underpin the greenback as worries mounted recently over emerging markets, strategists said.
The euro fell to $1.2875 from $1.3002.
Economic data out of the euro zone continued to paint a gloomy picture. The Frankfurt-based European Central Bank is widely expected to cut its key lending rate by a half point to 3.25% when its Governing Council meets Thursday. See full story.
The October purchasing managers index for the 15-nation euro-zone services sector indicated activity shrank at its quickest pace in a decade. The services PMI tumbled to 45.8 from 48.4 in September, and was weaker than expected.
Retail sales volume in the euro-zone fell by a smaller-than-expected 0.2% in September, but declined 1.6% on an annual basis, according to the statistical agency Eurostat.
The British pound slipped to $1.5877 from $1.5976.
Economists said a steeper-than-expected 0.8% monthly fall in September manufacturing output raised the odds of an extremely large rate cut by the Bank of England when its rate-setting Monetary Policy Committee concludes its two-day meeting Thursday.
Output fell 2.3% from September 2007, the largest annual decline in five years.
"We had expected a reduction of 50 basis points, however today's figures increase the chance of a steeper cut," said Benjamin Williamson, an economist at the Center for Economic and Business Research.
Most economists expect the MPC to cut its key lending rate by at least half of a percentage point, or 50 basis points, to 4%.
