Dollar Dips vs. Yen as Recession Fears Linger

The dollar dipped against the yen on Wednesday as doubts grew about the prospect of a U.S. auto industry rescue while data showing a record slide in consumer prices last month stoked fear of a deeper recession.

The euro weakened slightly, surrendering earlier gains, as fears about a deepening global recession prompted investors to shun stocks and other risky assets for the relative safety of the U.S. currency.

Safe-haven flows also tend to benefit the Japanese currency as investors sell assets financed with cheaply borrowed yen.

Analysts said many investors appear to have moved to the sidelines until the depth of a world recession becomes clearer, adding the resulting thin volume exaggerated price moves.

"The truth is we're seeing very poor liquidity and my sense is that a lot of people have taken their toys and gone home," said Firas Askari, head of currency trading at BMO Capital Markets in Toronto.

At midday, the dollar fell below 97 yen while the euro also fell below 122 yen .

The euro fell below $1.26 ,after earlier climbing as high as $1.2813, driven partly by the currency's move above a level marked by a cluster of automatic buy orders.

Sterling , however, rose against the greenback to above $1.50, though it too retreated sharply from a session peak of $1.5248.

The British currency rose despite minutes from this month's Bank of England policy meeting that showed policy-makers unanimously agreed to cut interest rates by 150 basis points and even discussed a bigger cut.

Dollar Overbought?

General market unease on Wednesday was sparked partly by problems in the commercial real estate sector, while the U.S. consumer price data stoked recession fears and expectations for the Federal Reserve to cut interest rates from an already low 1 percent.

Also of concern was the fate of the struggling U.S. auto industry, which some investors fear may fail to win emergency government loans.

More from CNBC.com:

• Charts Predict: Dow 6,400 in Less than a Month
• Grim Charts for the US Big Three Automakers
• Market Pros: Short-Term Looks Gloomy
• Farrell: Take the Subprime Losses and Move On
• Pros Say: Auto Bailout Globally Unfair
• Full Storm to Hit First-Half 2009

General Motors , Ford and Chrysler have warned that bankruptcy for one or more would lead to massive job losses, sparking fears of a deeper recession.

Executives from all three companies have been testifying before Congress over the past two days to press their case for $25 billion in emergency loans.

Michael Woolfolk, senior currency strategist at The Bank of New York-Mellon, said bankruptcy for any of them "could prove to be the next Lehman Brothers because of the systemic risk their failure would create."

For the Investor

• Get After-the-Bell Dow 30 Quotes
• Credit Spreads and Libor Data
• Futures and Pre-Market Data
• Currency Data

Markets tumbled in September when Lehman, then the No. 4 U.S. investment bank, failed.

Some analysts, however, said the dollar, which rallied sharply across the board in September and October, may be overbought and set for a modest decline in the remaining weeks of 2008.

Indeed, its gains against the euro and decline against the yen, while consistent with a recent pattern, were more subdued on Wednesday even as U.S. stocks fell more than 3 percent.

"The dollar-equity correlation may be fraying a bit, and we could see temporary dollar weakness over the next six weeks," said Ashraf Laidi, chief market analyst at CMC Markets in New York.

Copyright 2008 Reuters. Click for restrictions.