Dollar, Yen Rally as Unease About Economy Grows

The yen rose on Friday, notching its best weekly gain against the greenback since October, and the dollar rose against other currencies amid fears of weak U.S. corporate profits and fading hopes for a global recovery.

A report showing U.S. consumer sentiment soured in July also boosted the two currencies, which gain when investors sell risky assets such as stocks and commodities and buy back the low-yielding dollars and yen used to finance those purchases.

The yen was the main beneficiary, hitting multi-month highs against several currencies this week, including the euro. The dollar hit a five-month low below 92 yen Wednesday and shed 4.5 percent on the week, its biggest weekly slide since October.

The U.S. data "underlines the ongoing gloom facing the U.S. consumer and further delays prospects for a near-term recovery," said Brian Dolan, senior currency strategist at Forex.com, in Bedminster, New Jersey.

UBS strategist Brian Kim added that "earnings are still in the back of everyone's mind, and that increases uncertainty." A profit warning from Chevron boosted the specter of a weaker-than-expected second-half recovery.

The dollar was down at 92.40 yen, after dipping to 91.80, according to Reuters data, just above a five-month low. The euro was also down against the yen.

Against other currencies, the dollar rose on safe-haven buying. An index that measures it against six major currencies rose 0.5 percent while the euro fell against the dollar. Sterling fell 0.8 percent to $1.6208.

The Swiss franc fell after Swiss National Bank chief Jean-Pierre Roth said the central bank would continue to fight deflation by preventing franc strength.

The dollar rose 0.6 percent to 1.0844 Swiss francs.

Dollar Prospects, European Bank Worries

While the yen and dollar both do well when investors choose less risky assets, the yen outpaced its U.S. counterpart this week. Some analysts said that was partly because the dollar's status as the global reserve currency came under scrutiny at the Group of 8 meeting in Italy, although reaction was muted to Chinese calls for a review of the reserve currency system.

U.S. Treasury Secretary Timothy Geithner on Friday repeated that a strong dollar is in the U.S. interest.

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Some analysts said the dollar may yet get stronger. Data on Friday showed speculators had built up the largest position against the dollar since last July, before Lehman Brothers' collapse sparked panic and huge dollar demand.

Peter Frank, a Societe Generale strategist in London, said such large positions suggest a shift back into dollars may be imminent as optimism about the global economy fades.

"Speculators are still positioned for risk appetite, but the market is going the other way," he said.

Meanwhile, lingering worries about the euro-zone banking sector kept the euro under pressure. Earlier this week, Germany's finance minister said the Bundesbank could be used to buy up corporate bonds to help loosen up credit markets.

This week, the European Central Bank and euro zone national central banks bought 23 million euros' worth of covered bonds under a 60 billion euro program launched this week, the ECB said on Friday. The program is aimed at boosting lending to stimulate the ailing economy.

"The European banks are still sitting on major losses and we look to see more of that reported this summer," Dolan said.

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