Dollar, Yen Fall as BofA Rescue Aids Sentiment

The dollar and the yen fell sharply Friday as stabilizing stock prices around the world and fresh government aid for U.S. banks revived risk appetite and eroded safe-haven flows into those currencies.

News that Bank of America received a $20 billion government capital injection helped soothe investor concerns about the financial sector, which also boosted higher-yielding currencies such as the Australian and New Zealand dollars.

"We're seeing a shift in risk appetite. The inverse correlation with the U.S. dollar and yen has been pretty tight with the price action that we've been seeing in the stock market,'' said Terri Belkas, currency strategist at DailyFX.com in New York. "The news of the government helping out Bank of America is likely helping a little bit.''

In midday trading in New York, the dollar fell 0.5 percent to 84.021 against a basket of six major currencies.

The euro also recovered from a sell-off in the previous session as traders reassessed European Central Bank President Jean-Claude Trichet's comments following the ECB's decision to cut interest rates by a half percentage point to 2 percent.

Trichet, who said on Thursday that any further ECB rate cuts will be postponed until March at the earliest, on Friday dismissed the idea of cutting rates close to zero as the United States and Japan have done.

"Essentially, there's going to be a floor on European rates, perhaps at 1 or 1.25 percent, which will leave the euro with a moderately higher yield than the dollar and the yen,'' said Boris Schlossberg, director of currency research at GFT Forex in New York.

The euro gained to over $1.32, rebounding from a five-week low of $1.3025 hit on Thursday, according to Reuters data.

The euro rallied more than 1 percent to above 119 yen , while the dollar rose slightly to above 90 yen .

The British pound pared gains after shares in UK bank Barclays tumbled amid worries about banks' capital and outlook. Sterling last traded at $1.4734, up 0.5 percent.

Markets Remain Jittery

The aid for Bank of America followed the U.S. Senate's decision to allow the release of the second half of a $700 billion bank bailout program, handing an early political victory to President-elect Barack Obama, who will be sworn in next Tuesday.

Also, Democratic leaders in the House unveiled an $825 billion tax cut and spending package they hope will help Obama reverse the economic slump.

The Australian and New Zealand dollars gained 0.2 percent and 0.7 percent respectively versus the U.S. dollar.

Despite the Bank of America bailout, investors remained jittery amid persistent worries about a deepening economic downturn worldwide and more losses in the financial sector.

Citigroup and Bank of America both reported a fourth quarter loss and Citigroup said it would split into two operating units.

The revival in risk appetite "will be very short lived because there are still a lot of downside risks for the economy and financial markets,'' Belkas said.

The dollar earlier came under pressure after a government report showed investors sold U.S. Treasury bonds in November for the first time since August 2007, when the credit crunch began.

Foreign selling of U.S. Treasurys amounted to $22.88 billion compared with inflows of $32.87 billion the previous month, the Treasury Department said.

"Worth noting in today's report is the collapse of foreign demand for U.S. Treasurys,'' Danske Bank wrote in a research note. "If foreign investors have continued to sell Treasuys in the months following November it is somewhat disturbing (also for the dollar) given the large amount of debt expected to be issued during 2009.''

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