The dollar fell on Friday to its weakest in almost five months against major currencies on investor worries that the United States would lose its AAA rating, though Asian stocks headed for a solid weekly gain.
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 into higher debt in an attempt to boost their economies with big spending plans.
Although signs of hope in the global economy are helping to support Asian stocks, worries are also growing about the strength of any recovery and whether the shift into riskier asset such as oil is justified.
A weaker dollar is also strengthening Asian currencies, which is bound to hurt the export-dependent continent and further raise doubts among investors about whether a gain of more than 50 percent in Asian shares excluding Japan since early March is excessive.
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 as low as 80.257, its weakest since late December and was last down 0.2 percent at 80.302.
The slide in the U.S. currency comes as investors are finding it harder to ignore the effect of the Federal Reserve's zero interest rate policy and its efforts to keep long-term rates low through direct purchases of U.S. government debt.
The dollar slipped 0.3 percent from late U.S. trade to 94.08 yen after falling as low as 93.86 yen on trading platform EBS, its lowest since mid-March.
The euro rose 0.4 percent to $1.3945, its strongest since early January. Sterling, despite the S&P action, rose as high as $1.5893, its highest since early November according to Reuters data, and was last up 0.2 percent at $1.5885.
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.
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.
Surveys on Thursday also showed services and manufacturing in the euro zone contracted less than expected in May as firms saw the pace of decline in new orders ease, hinting the worst of a deep recession may be over.
But hopes for the global economy are being tempered by concerns about corporate profits.
Shares in Chinese personal computer maker Lenovo <0992.HK> lost 5.7 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.
Elsewhere, the MSCI index for Asian stocks outside Japan still rose 0.4 percent, putting it on track for a about a 4.5 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.
Among other riskier assets, U.S. crude futures rose 46 cents to $61.51, 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.