A positive tone in equity markets Friday dried up safe-haven flows into the U.S. dollar and Japanese yen while underpinning the euro, analysts said.
The dollar index , which measures the U.S. unit against a trade-weighted basket of six major currencies, slipped back to 85.794 in recent action from around 86.125 in North American activity late Thursday.
Shanghai stocks jumped overnight, while other Asian equities also rallied. European equities also climbed. See Asia Markets. Read Europe Markets.
U.S. stock index futures were mixed. See Indications.
The firmer tone, especially in Asia, reflected a rebound in appetite for riskier assets, said Kenneth Broux, an economist at Lloyds TSB.
The dollar and yen have benefited from safe-haven flows during the ongoing financial market crisis and economic slowdown, as investors shun riskier, higher-yielding investments in favor of lower-yielding funds.
The euro, meanwhile, trimmed early gains but remained slightly higher versus the dollar despite a sharper-than-expected, record drop in fourth-quarter euro-zone gross domestic product. See full story.
The euro traded to $1.2866, up from $1.2858 late Thursday.
The statistical agency Eurostat said GDP contracted at a quarterly pace of 1.5% in the final three months of 2008. That exceeded consensus forecasts for a 1.3% decline and marked the steepest quarterly fall since records began in 1995.
Euro-zone GDP posted quarterly declines of 0.2% in the second and third quarters, meeting the widely-used definition of recession of two consecutive quarters of shrinking GDP.
"Today's data wipes out any illusion that the euro zone is getting off lightly in this global downturn," said Joerg Radeke, an economist at the Center for Economic and Business Research. "Indeed, what has started as financial market turmoil has long moved to the real economy."
The rebound in risk appetite also boosted the British pound, which had been under heavy pressure in recent days on growing economic fears and signs the Bank of England was preparing efforts to boost the money supply.
The pound rose to $1.4516 versus the dollar, up 1.6% on the day. The euro retreated 1.7% versus sterling to 88.60 pence.
The yen lost ground.
The greenback rose to 91.47 yen, up from 90.83 yen late Thursday. The euro was up 0.6% versus the Japanese currency to 117.69 yen.
Nervousness ahead of this weekend's meeting of finance ministers and central bankers from the Group of Seven nations in Rome also helped curtail support for the Japanese currency, traders said.
While the talks are expected to focus largely on efforts to rebuild confidence in the financial sector, Japanese authorities may press for stronger language aimed keeping a lid on the currency, Broux said.
