The dollar fell on Friday to its weakest level in five months against major currencies on fears that the United States would lose its AAA rating, while Asian stocks skidded on fears that any recovery in the global economy will be sluggish.
The dollar's descent was sparked on Thursday when Standard & Poor's cut its outlook on Britain's top rating to negative, bringing into focus other AAA-rated countries that are running deeper in debt as they attempt to boost their economies with big spending plans.
Sterling recovered from the initial rout, but that was not the case for the dollar, whose descent is sparking fears of sharp gains in Asian currencies just as the region is putting its hopes behind a recovery in exports.
Asian shares lost ground after gaining initially, though Britain's FTSE 100 <.FTSE> looked poised to rebound from Thursday's falls, while U.S. stock futures remained stagnant.
Although signs of hope in the global economy have helped Asian stocks outside Japan gain more than 50 percent since the 2009 low in early March, worries are also growing about the strength of any recovery and whether the shift into riskier assets such as oil is justified.
Markets all around the world appear to be looking for direction, and any chance of a U.S. downgrade would really hit U.S. assets such as the dollar and stocks, said Masayoshi Okamoto, head of dealing at Jujiya Securities.
For Japan, this situation comes just after earnings have come out and companies have set their currency rates, many of them at 95 yen. The chance of any further yen rise really paints a gloomy picture.
The dollar index <.DXY>, a gauge of its performance against six major currencies, fell to as low as 80.210, its weakest since December but later cut losses to be down 0.1 percent at 80.422.
The greenback was headed for its biggest weekly fall since the U.S. Federal Reserve launched its large-scale purchases of U.S. Treasuries in late March, which slammed the world's largest reserve currency on worries it amounted to flooding the system with dollars.
The dollar slipped to as low as 93.86 yen on trading platform EBS, the lowest since December.
The yen also firmed after Japanese Finance Minister Kaoru Yosano said on Friday the country is not thinking about intervening in currency markets.
The remarks came as market players have started to suspect that Japanese officials may consider intervening to prevent further strength in the yen.
The dollar was last down 0.2 percent from late U.S. trade to 94.15 yen.
The euro rose 0.2 percent to $1.3923, after earlier hitting its strongest since early January. Sterling, despite the S&P action, rose as high as $1.5898, its highest since early November, and was last up 0.1 percent at $1.5860.
S&P gave a clear criteria that a country whose government debt burden is approaching 100 percent of GDP could have its rating downgraded, said Hideki Amikura, deputy general manager of forex trading at Nomura Trust and Banking.
That prompted investors to think they should not be so optimistic about credit rating on the United States.
Total U.S. government debt is equal to about 80 percent of U.S. output, while Japan's public debt as a percentage of GDP was about 170 percent as of 2008, among the highest in the world.
But U.S. Treasuries recovered after concerns about debt levels sent prices tumbling on Thursday. The Treasury's announcement that it would sell $101 billion in notes next week also sparked supply concerns.
Benchmark 10-year U.S. Treasury notes rose about one point, sending yields down to 3.34 percent from the 3.37 percent level hit on Thursday that had marked the highest yield on an intraday basis in nearly two weeks.
ONWARDS AND UPWARDS?
The worries about the United States' AAA rating are coming at a time when data is pointing to a U.S. economic recovery, but one bound to come as a long slog.
A factory index for the U.S. Mid-Atlantic area showed on Thursday only marginally less weakness, while the Congressional Budget Office said the economy will likely start growing again in the second half of 2009, but with the jobless rate peaking at more than 10 percent against 8.9 percent now.
Hopes for the global economy are also being tempered by concerns about corporate profits. Shares in Chinese personal computer maker Lenovo <0992.HK> slumped 9.4 percent a day after posting a second consecutive quarterly loss.
In Japan, exporters' shares such as Canon <7751.T> fell amid worries about the strengthening yen eating into profits earned abroad, leaving the Nikkei average <.N225> flat on the day.
The MSCI index for Asian stocks outside Japan fell 0.8 percent, though it was still on track for about a 3.3 percent gain for the week.
The gauge hit a seven-month high on Wednesday, marking a 55 percent gain since the yearly low in early March.
We're seeing some consolidation after the markets rose a bit too fast. What's been happening this week globally is that markets have gotten a bit of a reality check on the state of the overall economy, said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.
But among other riskier assets, U.S. crude futures rose 42 cents to $61.47 a barrel, recouping some of its 1.6 percent slide on Thursday when investors had grown wary about recent gains.
Oil had hit a six-month peak above $62 a barrel on Wednesday, when weekly U.S. government inventory data showed a steep drop in crude and gasoline stockpiles ahead of the U.S. Memorial Day weekend that marks the start of the summer driving season.