LONDON (MarketWatch) -- The dollar tumbled to a 13-year low against Japan's yen Friday and fell against most major currencies after hopes for a $14 billion loan package for the U.S. auto industry collapsed.
Legislation that would have authorized the loans failed to overcome resistance by Republican senators who had demanded the United Auto Workers accept larger pay cuts. See full story.
The White House, however, left open the possibility of using Troubled Asset Relief Program funds for the automakers.
The dollar dropped as far as 88.38 yen in Asian trading, according to FactSet Research data. Dealers said the dollar sank as low as 88.10 yen on some platforms, its lowest level since August 1995.
"It's a risk-appetite trade. There isn't much risk appetite, and when that happens the yen tends to go up," said Russell Jones, head of fixed-income and currency strategy research at RBC Capital Markets.
The greenback subsequently trimmed losses but remained significantly lower at 90.22 yen, down from 91.64 yen in North American trading late Thursday.
Fears that Japanese authorities could intervene to stem the yen's tide prompted some short-covering, analysts said.
Asian stock indexes tumbled, underscoring high levels of risk aversion. See Asia Markets.
European stocks also plunged and U.S. stocks opened sharply lower. See Europe Markets. Read Indications.
The yen has rallied amid global financial and economic turmoil as traders steer clear of riskier assets denominated in higher-yielding currencies.
"If the bearishness in the equity market continues into next week I think the dollar/yen will test 85," said Masafumi Yamamoto, a foreign-exchange strategist with Royal Bank of Scotland in Tokyo.
All eyes on the Bank of Japan
But with the Japanese economy also in recession, the yen's strength increasingly raises the prospect of intervention by the Bank of Japan, analysts warned.
Remarks by Japanese officials, however, appeared ambiguous about the possibility of near-term action.
Finance Minister Shoichi Nakagawa played down the prospect of near-term intervention, news reports said, saying "for now, we aren't considering such a move."
"Of course, if the foreign-exchange market moves become more volatile, we are going to consider what we should do," Nakagawa said.
Strategists at KBC Bank in Brussels said ongoing deterioration of the global financial and economic picture would likely continue to bolster the yen.
Selling dollar/yen on upticks "still looks the most valuable approach," they wrote.
As for the dollar, it traded mixed against most other major counterparts Friday. The dollar index , a measure of the greenback against a trade-weighted basket of six currencies, stood at 83.517, off slightly from its level late Thursday.
