LONDON (Reuters) - The dollar inched up against a basket of major currencies and the yen strengthened broadly on Wednesday as deepening unease about the world economy put stock markets back under downward pressure.
Asian and European stock markets disregarded a late rally the previous day on Wall Street to trade in the red on Wednesday, while U.S. stock futures pointed to a weak open.
The yen was the main beneficiary of this renewed uncertainty, fueled by growing concern over the U.S. auto industry which is seeking billions of dollars in government aid to steer it from the brink of disaster.
Top executives at General Motors (GM.N: Quote, Profile, Research, Stock Buzz), Ford (F.N: Quote, Profile, Research, Stock Buzz) and Chrysler CBS.UL warned Congress that their industry was in serious trouble.
Economic underperformance, financial market weakness and asset deleveraging have boosted the yen lately as investors cut back on carry trades to seek safety and liquidity in the currency that enjoys one of the world's largest current account surpluses.
The dollar has also held up in this environment because U.S. investors have liquidated foreign asset holdings and brought cash back home. U.S. Treasury data on Tuesday showed a total net inflow of $143.4 billion in September, the largest since early 2006.
Currency traders will also look to minutes from the last policy meetings of the Federal Reserve and Bank of England on Wednesday for clues about how deeply and how quickly interest rates are likely to be cut again.
"The concerns pertaining to the U.S. auto sector are weighing on markets to a certain degree," said Phyllis Papadavid, currency strategist at Societe Generale. "We continue to be positive on the yen, especially against the euro."
At 0900 GMT the dollar was down a third of a percent against the yen at 96.60 yen, and the euro was down half a percent at 121.90 yen.
The euro was down 0.1 percent against the dollar on the day at $1.2604 and the dollar index, a measure of the greenback's value against six major units, was up 0.1 percent at 87.24 .DXY.
STEERING THE DOLLAR
U.S. Treasury Secretary Henry Paulson reiterated on Tuesday his opposition to diverting funds from a $700 billion financial bailout programme to rescue Detroit on doubts about the automakers' ability to repay the money and on general resistance to spending more taxpayer money on corporate bailouts.
Some analysts argue that bankruptcy at one of the "Big Three" U.S. automakers would touch off a cascade of failures that would cost tens of thousands of jobs and make the economic downturn even steeper.
But others warn that diverting funds of the $700 billion Troubled Asset Relief Program away from supporting the financial system could unleash even greater market and economic turmoil.
"Without such (broad fiscally stimulative) action, we fear that the U.S. policy could lose credibility leading to eventual declines in the dollar," UBS strategists wrote in a note on Wednesday.
