US dollar retreats after prior day rally

NEW YORK: The US dollar fell broadly on Friday, reversing some of the prior day's sharp gains, as Wall Street stocks rebounded and traders feared a downgrade to the United States' credit rating was imminent.

The euro got an added boost after Italy's Prime Minister Silvio Berlusconi pledged to speed up austerity measures and bring the country's budget into balance by 2013.

The news helped temporarily calm markets a day after US stock indexes posted their worst losses in two years. The dollar rallied on Thursday after Japan intervened to curb yen strength and on worries the euro zone debt crisis was spreading.

A report showing stronger-than-expected US jobs growth in July assuaged some concerns the economy was slipping back into a recession, but investors remained jittery.

"We're seeing a retracement from yesterday, as opposed to everything is just fine," said Camilla Sutton, senior currency strategist at Scotia Capital in Toronto.

The euro last traded up 1.2 percent at $1.4278, after climbing to a session high of $1.42987 on trading platform EBS. The common currency also gained 0.3 percent to 111.98 yen.

As frustration grows at what investors see as the European Central Bank's ineffectual response to the crisis, sources said the bank is demanding that Italy commit to fast-track specific welfare reforms and a constitutional amendment enshrining a fiscal rule before it will buy Italian bonds.

On Thursday, traders were disappointed that the ECB were buying Portuguese and Irish bonds instead of Italian and Spanish debt.

Adding to weigh on the dollar, rumors circulated that ratings agency Standard & Poor's would downgrade the US credit rating after the market's close. S&P said it would not comment on the rumors.

"The strong jobs report was followed by a lot of chatter about an S&P downgrade and that has weighed on the dollar," said Andrew Cox, G10 strategist at CitiFX, a division of Citigroup in New York. "While the market lacks conviction, we are definitely in risk-off mode."

Against the yen, the dollar was last at 78.40, down 0.8 percent on the day. Support was seen around 78.27 yen, a 50 percent retracement of the dollar's rise from its four-month low of 76.29 to Thursday's high of around 80.25 yen.

The dollar was last at 0.7667 francs, up 0.3 percent, after sliding to a fresh record low of 0.75776.

The franc also rose to a record high against the euro of 1.0710 francs, before retreating. The euro last traded at 1.0952 franc, up 1.5 percent on the day.

The Swiss National Bank announced a surprise interest rate cut this week to stem the franc's rally. The Bank of Japan followed a day later by selling yen in the currency market.

Japanese Finance Minister Yoshihiko Noda said he was closely watching yen moves on Friday, signaling a readiness to continue selling the currency.

"There is a good likelihood they will intervene again as they will want to make it clear to the markets that they will not be tested and they were not one-off interventions," Cox said.

Comments from SNB Chairman Phillip Hildebrand that the SNB would not accept a further appreciation in the franc without acting fanned fears of official action.

But with worries about a global economic slowdown, analysts doubted actions by central banks will spark a trend reversal.

Copyright Reuters, 2011