NEW YORK (MarketWatch) -- High-yielding currencies like the Australian dollar and the British pound tumbled against the U.S. dollar Thursday as investors fretted about declining stock markets and an unraveling world economy.
Sterling dropped 1.5% to $1.4734, and the Australian dollar plunged 4.1% to 61.04 U.S. cents.
The Swiss francs fell to its lowest level against the dollar since July 2007 after the Swiss National Bank surprised markets with a steep, one-percentage point rate cut, noting fading price pressures and a deteriorating world economy. See full story.
The Swiss franc traded at $1.2243 francs, down about 1% from late Wednesday, after earlier falling as low as $1.2100.
"This [interest rate cut] move confirms a highly pro-active and aggressive central banking community and there will be more to come" from the Bank of England and European Central Bank, said Audrey Childe-Freeman, senior currency strategist at Brown Brothers Harriman.
U.S. equities plunged Thursday after Democratic leaders said there is no deal on aid yet for the Big Three U.S. automakers, with the S&P 500 Index ending at its lowest level in more than 11 years. See Market Snapshot.
"The financial markets have been very schizophrenic today indicating that investors are still nervous," said Kathy Lien, director of currency research at GFT. "The U.S. dollar and Japanese yen have soared in response to the liquidation and repatriation."
The dollar index , a measure of the greenback against a trade-weighted basket of six major currencies, rose 0.3% to trade at 88.265.
The euro fell to $1.2451 from $1.2496 late Wednesday. The dollar slipped 1.7% to 94.15 yen.
On the data front, the U.S. Labor Department said initial claims for jobless benefits rose to 542,000 in the latest week, the highest since 1992. See full story.
A Philadelphia-area manufacturing gauge for November also fell to an 18-year low.
Crude-oil futures fell for a fifth session Thursday, slumping 7.5% to close at the lowest level in more than three years, as global stocks tumbled and economic worries deepened. See Futures Movers.
To cut or not to cut
Sterling's drop even came as U.K. retail sales slipped by a less-than-forecast 0.1% in October.
"Overall, the retail numbers were better than expected -- but still show stagnation in underlying growth prospects as consumers suffer from the decline in credit availability, the squeeze on real disposable incomes and worries about unemployment," said Charles Davis, an economist at the Center for Economics and Business Research.
Davis expects the Bank of England to follow November's 1.5 percentage point rate cut with another half-point cut, which would take U.K. rates down to 2.5%.
Later Friday, the Bank of Japan's policy board will announce the results of its two-day policy meeting, at which it was expected to consider additional measures to calm financial markets and bolster consumer confidence.
Analysts say the central bank is unlikely to announce further interest rate cuts, after it lowered its overnight call rate to 0.3% from 0.5% last month. See full story.
J.P. Morgan Chase & Co. economists said late Wednesday they now expect the U.S. Federal Reserve to make two half-point cuts to its fed funds rate, currently at 1%, by the end of January, bringing the fed funds rate to 0%.
The U.S. central bank will then hold this benchmark rate at 0% for the rest of 2009, they said. The bank previously projected the central bank would cut rates by a quarter-point in December, to 0.75%, and then hold rates at that level.
"The change in our call is motivated in large part by the risk that deflation becomes more likely in an environment where labor market slack is building, and ongoing financial tightening is delaying the prospect that slack begins to get worked down," wrote Michael Feroli, U.S. economist for J.P. Morgan.
