Yen Up, Dollar Rises vs Euro on Recession Fears

The yen rose against the dollar and euro Friday as more signs of weakness in the U.S. economy heightened fears that the ongoing credit crisis had pushed the global economy to the brink of recession.

Though governments worldwide have started pouring cash into troubled banks, helping reduce the cost of interbank borrowing, investors remain worried about high cost to the economy from a credit crisis that has persisted for more than a year now.

And with signs of trouble now emerging in economies in Eastern Europe and Asia, investors have reversed risky trades financed with low-yielding yen, helping lift the Japanese currency at the expense of its higher-yielding rivals.

The dollar, which benefits from risk aversion because dollar-based investors repatriate funds, gained on the euro.

"The focus is shifting from the credit crisis to a looming global recession," said Omer Esiner, senior currency analyst at Ruesch International in Washington.

"I'd characterize recent U.S. data as dismal, but no matter how bad things get here, the global picture looks just as bad," and that will support the dollar and the yen, he said.

Early morning, the dollar was down versus the yen, as was the euro , edging closer to a three-year low around 132.

European stocks pared earlier gains while U.S. stocks pointed toward a lower opening on Wall Street.

The euro also fell against the dollar, while sterling was flat.

"We're still in an incredibly unstable market which will persist for a long time. Although we've had all these policy initiatives, it won't necessarily stop the extreme moves we've seen across markets," said Bilal Hafeez, foreign exchange strategist at Deutsche Bank in London.

"Given that context, I expect to see the yen strengthen across the board."

U.S. economic data has discouraged traders this week, with reports on retail sales and industrial output showing sharp declines.

On Friday, a Commerce Department report showed U.S. housing starts continued to fall in September, and markets awaited a fresh reading on consumer sentiment due at 10 a.m.

The dollar, however, has held its ground against most higher-yielding currencies, thanks to safe-haven flows.

Esiner said much of that is also driven by concern about the economy beyond U.S. borders.

With the Federal Reserve having slashed interest rates to 1.5 percent, he said there is little room for further cuts.

That's not so in the euro zone, Britain and beyond, where rates are much higher.

"That means they have a lot further to fall, so in a global recession scenario, the euro, sterling, Aussie and kiwi have a lot more room to the downside," he said.

The Australian dollar, with rates of 6 percent, was down 2 percent against its U.S. counterpart as was the New Zealand dollar.

Further unnerving investors on Friday was news that Ukraine and Hungary had turned to the International Monetary Fund and other foreign lenders to help bolster their financial systems.

That soured sentiment on emerging markets in general and sent investors back into yen, considered low-risk because Japan's key interest rate remains at just 0.5 percent.

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