Washington's latest bank rescue left the dollar and the Japanese yen under pressure Friday, drying up recent safe-haven flows as global equity markets staged a rebound, strategists said.
Early Friday, the U.S. Treasury announced it would inject $20 billion into Bank of America Corp. It will also provide a backstop against losses on some $118 billion in assets as the banking giant struggles to digest its acquisition of troubled brokerage Merrill Lynch. See full story.
"A return of risk appetite is dominating markets, supporting equities, commodities, (and) the euro, while bonds, the dollar and yen are under some pressure," wrote strategists at KBC Bank in Brussels. "The rescue operation of [Bank of America] is the driver."
Foreign-exchange traders also cast an eye over sizable fourth-quarter losses reported by Bank of America as well as fellow blue-chip Citigroup.
Meanwhile, the Irish government said it would nationalize Anglo Irish Bank, the country's third-largest lender. See full story.
Relief in the financial sector "is positive for growth-sensitive currencies and broadly negative for the U.S. dollar," said strategists at HBOS.
The dollar index , which measures the greenback against a basket of six major currencies, stood at 83.571, down from 83.861 in early trade, and from North American activity late Thursday.
The greenback further weakened after the Labor Department said inflation fell 0.7% in December, marking the smallest annual gain in 54 years.
Economists surveyed by MarketWatch expected the consumer price index to drop 0.8% last month. Core prices, excluding energy and food, were flat, matching expectations.
Another government report showed demand for long-term U.S. assets fell to $21.7 billion in November, compared with $400 million in October.
"The overwhelmingly [...] bearish news only had a limited impact on the dollar because much of the bad news has already been baked in," said Ashraf Laidi, chief market strategist at CMC Markets."The bigger surprises will come from earnings which is why we are keeping a close eye on equities."
Separately, the University of Michigan's latest consumer sentiment survey showed a slight gain in early January from late December.
The euro rose to $1.3284, up from $1.3255 in early trade and from $1.3136 in late trade Thursday.
The yen, which has been the primary beneficiary of renewed safe-haven flows amid heightened banking-sector jitters and recent equity plunges, was also broadly lower to cap off the trading week.
The dollar bought 90.42 yen, up from 89.86 yen late Thursday. The euro rose to 120.08 yen from 118.02 yen.
Against the British pound, the euro changed hands at 89.04 pence, down from 89.65 pence.
Commodity-currency play
Meanwhile, commodity-linked currencies, including the Australian, New Zealand and Canadian dollars, all rallied against the greenback.
The Australian dollar was 1.7% higher at 67.34 U.S. cents, while the New Zealand dollar rose 1.7% to 54.59 U.S. cents. The Canadian dollar added 1% to 80.63 U.S. cents.
"For further significant gains a rally in commodity prices now needs to be observed," the HBOS strategists wrote. "A failure for commodities to rally (which we think is likely) would suggest the expectations of the global outlook have not materially changed and question this latest currency rally."
