Dollar, Yen Gain as Economy Worries Grow

The dollar and yen rose against the euro and other currencies from countries with high interest rates as fears of a deep global recession sent investors fleeing for the safest assets.

The Swiss franc also fell sharply after the Swiss National Bank unexpectedly slashed interest rates by a full percentage point, citing worsening economic conditions.

With anxiety about economic growth on the rise, investors continued yanking money out of risky assets such as stocks, commodities and high-yield currencies and parking it in U.S. government bonds or the Japanese yen, which many borrowed cheaply to finance investments elsewhere.

These safe-haven flows pushed two-year U.S. Treasury yields to a record low and pushed the high-yielding New Zealand dollar to its lowest level against the greenback since 2003. Oil fell below $50 a barrel, its lowest since May 2005.

From 'Fast Money':

• Epicenter of the Sell-Off: Citigroup

Data showing the number of Americans filing for jobless benefits spiked to a 16-year high of 542,000 last week added to the unease, as did a report showing U.S. mid-Atlantic factory activity at an 18-year low.

"Anxiety about the financial markets is shifting to anxiety about fundamentals and the real economy, and that's keeping the overall levels of risk aversion very high,'' said Vassili Serebriakov, currency strategist at Wells Fargo in New York. "We've had disappointing U.S. economic data and we believe the bear market in equities will continue, lending more support to the dollar and yen.''

The dollar was last down at below 95 yen after earlier falling to 94.30 yen, a three-week low. The euro also fell to below 119 yen .

Against the dollar, the euro slipped to near $1.25 while sterling fell more than 1 percent to below $1.48. The dollar rose 0.7 percent to 1.2196 Swiss francs after the SNB cut interest rates.

The high-yield New Zealand dollar fell 2.6 percent to a nearly six-year low of US$0.5279 while the Australian dollar plunged 3.3 percent to US$0.6174.

Stocks Swoon, Deflation Fears Emerge

Asian and European stocks fell sharply on Thursday and the U.S. benchmark S&P 500 index at one point hit its lowest level since October 2002. The index ended on Wednesday near a six-year low.

Analysts said investors remained nervous about the U.S. automakers, which are seeking $25 billion in emergency loans from Congress, and the viability of banking giant Citigroup , whose shares fell below $5 to their lowest price in nearly 14 years.

For the Investor

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

Those fears will ensure continued gains for the dollar against most currencies save the yen, said Alan Ruskin, international strategist at RBS Greenwich Capital in Greenwich, Connecticut.

"I am disinclined to fight the risk aversion trade,'' he said. "There are too many fires to put out—a variety of U.S. financial institutions in the spotlight and an auto sector crying for help with time working against it.''

On Wednesday, U.S. data revealed a record decline in consumer prices in October, sparking fears of deflation, a risk Federal Reserve Vice Chairman Donald Kohn said had increased.

The Fed also forecast the U.S. economy would contract in the second half of 2008 and first half of 2009, raising the prospect of a further reduction in the benchmark interest rates from an already low 1 percent.

"People are starting to give up on the hope that the economy is going to recover,'' said David Woo, head of currency research at Barclays Capital in London.

Copyright 2008 Reuters. Click for restrictions.