Risk rally pummels dollar, yen hits record high

NEW YORK: The US dollar fell broadly on Friday and hit a record low against the yen on speculation Europe was closer to solving its debt crisis and talk the Federal Reserve may take new measures to boost growth.

France and Germany said in a joint statement that European leaders would discuss a solution to the crisis on Sunday, but no decisions would be adopted before a second meeting to be held by Wednesday at the latest.

Optimism European leaders will take more measures to contain the crisis after conflicting news reports this week revived investor appetite for stocks and other growth-oriented investments and cut demand for the safe-haven greenback.

Adding to losses in the dollar, Federal Reserve Governor Daniel Tarullo said on Thursday there is need for additional stimulus measures and the Fed should consider buying more mortgage bonds to boost the weak housing sector and economy. Fed easing is seen as negative for the dollar because it lowers US yields.

"It is very much a dollar negative environment. Risk is on," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.

Against a basket of major currencies, the dollar last traded down 0.65 percent at 76.473 compared with 76.249 earlier, the lowest since mid-September.

Paresh Upadhyaya, head of Americas G10 FX strategy at Bank of America Merrill Lynch in New York, said the currency market followed equity prices.

The US dollar has shown a strong inverse relationship with stocks in recent trading. The 25-day correlation between the dollar index and the Standard & Poor's 500 Index hit negative 0.927 on Friday.

The dollar index is poised to fall for a second week in a row after last week's 0.66 percent drop, which was the biggest since May 2009.

The euro rose 0.5 percent to $1.3849, having hit $1.3900 on Reuters data and recovering from a low of $1.3703.

"The market is giving the benefit of the doubt that they are going to come up with some sort of a meaningful stopgap measure in Europe," said Boris Schlossberg, director of currency research at GFT in New York.

But other analysts were less optimistic about a meaningful plan to contain the region's debt crisis, with a chance the euro could revisit $1.30 set by year-end.

"I have modest expectations. This is a political problem which has economic implications. Unfortunately, the markets are held captive," said Stephen Wood, chief market strategist at Russell Investments in New York.

The euro dropped 0.4 percent to 105.42 yen. It also slipped 0.4 percent against sterling and lost 0.6 percent versus the Swiss francs.

RECORD HIGH YEN

The dollar fell as low as 75.78 yen on trading platform EBS, surpassing its previous record low of 75.941 set in August, bringing back into focus the threat of official intervention to weaken the Japanese currency.

Traders reported initial large selling of dollars from a UK clearer and macro funds, and losses accelerated after the pair broke through a series of stops around 76.30 and 75.90.

It last traded down 1 percent at 76.09 yen, coming off lows on reported buying from Japanese banks at the 76.00 level. At current levels, it was on pace for its biggest daily fall since Aug. 26.

Talk that Japanese authorities may follow the footsteps of the Swiss National Bank in putting a floor in dollar/yen had buoyed the currency pair in recent sessions, but investors resumed yen buying after market speculation failed to materialize.

"I do think we are increasingly vulnerable to (Bank of Japan) interference. Irrespective of whether it's going to be effective or not, they're going to come in at 75," said GFT's Schlossberg.