The dollar retreated against the yen and euro Monday, weighed down by weakness in the U.S. stock market after comments by a top Citigroup official raised anew concerns about global credit.
U.S. bond prices rose, boosted by safe-haven bids, while equities posted sharp losses, led by financial services, on Citigroup's gloomier economic outlook.
Citigroup Chief Financial Officer Gary Crittenden Monday said he was "not optimistic" that markets for collateralized debt obligations and other fixed-income products, hammered by this summer's credit crunch, will soon recover.
Stocks Deal a Blow to Dollar
"The stock market is definitely having an impact on currencies," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.
"The relationship between equity markets and the yen crosses has come back in full force and that's the primary driver today. It looks like Citigroup's comments that the credit crisis is intensifying has precipitated the stock market decline," Dolan said.
Citigroup and other global banks earlier said they were pooling money to prevent investment funds from having to dump assets into the market. The news initially lifted stocks, but shares later fell as the move reawakened concerns about the fallout from the credit squeeze.
The yen, which tends to fall as risk appetite increases as investors borrow cheap yen to buy higher-yielding assets, fell in response to firmer equities earlier, and the dollar hit a peak of 117.94 yen, its highest since mid-August. But the dollar slipped against the yen as stocks dropped to trade at 117.33 yen, down 0.2 percent on the day.
Also weighing on the dollar against the yen was the surge in oil prices, which jumped to an all-time high above $85 per barrel on Monday. Oil prices were propelled by strong demand from booming commodity markets.
The euro rose 0.1 percent to $1.4199, not far from its record high above $1.4280 set two weeks ago.
Against the yen, the European currency traded as high as 167.72 yen, according to Reuters data, its highest level since July 23. It last traded at 166.61 yen, little changed on the day.
The dollar weakened against a basket of six major currencies, trading 0.1 percent lower at 78.084.
Bernanke to Speak Late Monday
With no first-tier economic data due Monday, investors were focused on a speech by Federal Reserve Chairman Ben Bernanke on the economic outlook scheduled for 7 p.m. New York time hint on the outlook for U.S. interest rate cuts.
"We caution that the speech may be particularly dollar positive in the event that Mr. Bernanke expresses an upbeat assessment on consumer spending to the extent of scaling down expectations for further rate cuts," said Ashraf Laidi, chief currency strategist at CMC Markets USA in New York.
He expects Bernanke to shed light on the resilience in consumer spending, which has the potential of dampening chances for Fed easing this month.
Market players are also cautious about making active bets on currencies ahead of the G7 meeting later this week.
Amid the focus on the G7, European Central Bank President Jean-Claude Trichet told a Russian newspaper, which was published on Monday, that the euro's exchange rate should reflect fundamentals and excessive currency moves are bad for growth.
"Because of the G7 meeting later this week, we are expecting lots of commentaries from government officials, but I doubt, unless we see real intervention, that their commentaries will have any lasting effect on the dollar or the yen or even on the Chines yuan," said Brian Taylor, senior currency trader at M&T Bank in Buffalo, New York.