The US dollar had its biggest weekly drop against the yen since March, sliding 3 percent, as a decline in US consumer confidence damped optimism the economic recovery will gain pace and boost stocks.
Declines in the dollar came as the Standard & Poor's 500 Index and Dow Jones Industrial Average recorded their biggest weekly slides since trading resumed after the September terrorist attacks. The S&P 500 is down 20 percent this year and reached its lowest level since 1997 on concern companies are inflating earnings and that a slowing economic recovery will hinder profit growth.
"The negative sentiment is magnifying movements in stocks, which is spilling over to cause weakness in the dollar," said Leslie Globits, who oversees international stocks for Victory Capital Management, which invests US$71 billion in assets. "I expect further dollar weakness, which will translate to yen strength and euro strength."
The US currency fell to Japanese yen 116.49, its weakest level since Sept. 24, from Japanese yen 117.11 on Thursday, before trading at Japanese yen 116.84.
The dollar slid 1.8 percent this week to US$0.9912 per euro, compared with US$0.9878 on Thursday.
"We're seeing capitulation on the dollar," said Andrew Delano, a currency analyst at IDEAglobal, an economic research firm.
"Traders are still comfortable to lean on the trend, which is a weaker dollar and weaker stocks."
The US currency extended declines as the University of Michigan reported its preliminary July consumer sentiment index fell to 86.5 from 92.4 in June, the biggest drop since September.
Economists surveyed by Bloomberg News expected a gain to 93.
The report reflects "equity weakness and the effects of a still-weak labor market," said Delano. "For the dollar, this is discouraging and leans toward taking away what had been a crutch of sorts: consumers confident enough to spend in the face of slowdown."
The dollar failed to get a bounce earlier as the government said US retail sales climbed 1.1 percent in June from a larger-than-expected drop in May.
The S&P 500 sank 6.8 percent this week, the Dow tumbled 7.4 percent and the NASDAQ Composite Index shed 5.2 percent.
For the past three months, the dollar has moved in the same direction as US stocks on 95 percent of trading days, compared with about five or fewer days in every 10 during the previous three-month period, according to Bloomberg data.
Investors have driven equities lower as companies including Bristol-Myers Squibb Co, Qwest Communications International Inc, WorldCom Inc and Xerox Corp have said they're under federal investigations, adding to concern companies are misrepresenting their earnings.
"There's mistrust and anxiety on so many levels with the possibility lingering of terrorist attacks, corporate problems and earnings," said Lisa Finstrom, a currency analyst at Salomon Smith Barney, Inc. "We're in a very skittish environment," and the dollar will likely weaken to US$1.03 per euro by October, she said.
Japan's government has sold its currency on seven days since May 22 to stem the yen's 13 percent climb this year against the dollar. Instead, the yen is about 6 percent stronger than when the Ministry of Finance started directing the central bank to sell the currency, around the Japanese yen 124 per dollar level.
Japan's Finance Minister Masajuro Shiokawa said this week the government "will never allow the yen to go back to Japanese yen 115 or Japanese yen 116," indicating his ministry will sell the currency before that.
Traders are going to test the resolve of Shiokawa and the finance ministry to see if they're serious about keeping the yen from breaking through the Japanese yen 115 level, said Neil MacKinnon, head of research at ECU Group Plc in London, which manages currency risk.
"To save face and show their credibility isn't badly dented, they have to act" and sell yen again, he said.
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