NEW YORK (Reuters) - The dollar and yen fell on Friday as Wall Street rebounded and reports that banking giant Citigroup was mulling a merger helped quell some of the market's worst fears about the financial crisis.
The more relaxed mood prompted those who had lately sold risky assets in favor of the U.S. and Japanese currencies to reverse course and move back gingerly into stocks, commodities and higher-yielding currencies such as the euro and sterling.
"It feels like we've reached a point where total fear is receding a little. There's an inkling of hope that we may be near a bottom, which is reflected in equities and high-yielding currencies today," said Boris Schlossberg, senior currency strategist at GFT Forex in New York.
Analysts warned, however, that investor anxiety has hardly evaporated, noting the euro and sterling had relinquished much of their rise against the dollar by midday and U.S. stock gains had also eased.
"We see little to suggest to us that today's drop reflects an underlying trend," said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York, adding that risk-aversion would continue to boost the dollar in the short run.
Early in New York, the euro was up 0.5 percent at $1.2520 but well off a $1.2640 session high. It rose 1.8 percent to 119.23 yen. Sterling added 0.5 percent to $1.4790. The dollar rose 1.2 percent to 95.15 yen.
U.S. stocks were boosted partly by news that Citigroup (C.N: Quote, Profile, Research, Stock Buzz), which has lost half its market value this week, was considering selling parts of its business or merging with another company.
Citigroup's board of directors is scheduled to meet on Friday to discuss options, the Wall Street Journal reported, citing people familiar with the situation.
Worries about the future of Citi pushed the bank's shares to their lowest in more than a decade on Thursday, helping to push the S&P 500 index to its weakest point since 1997.
But while the Citi news eased some concern about another major bank failure, some said it would not be enough to improve lending conditions and pull markets out of their malaise.
Schlossberg said the test will be whether investors feel confident enough to remain long U.S. equities and higher risk currencies such as the euro and sterling through the weekend.
"If you see people buying equities into the close today, that will be euro and sterling positive, but if stocks sell off in late trade, currencies will react and the dollar and yen should benefit," he said.
Earlier, euro zone data showed the manufacturing and service sectors contracting much more quickly and deeply than expected in November, rekindling worries about global growth.
The weaker-than-expected PMI survey "likely will feed the recession fears gripping markets and pose more downside for risk assets," JP Morgan currency strategists said in a note.
The yen was mostly a victim of renewed risk appetite on Friday. though it also buckled when Finance Minster Shoichi Nakagawa said authorities must be ready to deal with market price swings. Analysts said investors saw that as a warning that Japan could still step in to slow yen gains.
(Additional reporting by Naomi Tajitsu in London; Editing by Chizu Nomiyama)
