The dollar slipped on Friday after a draft communique from Group of 20 leaders said economic stimulus measures would remain in place for now, suggesting U.S. interest rates would remain low.
The dollar fell below 90 yen to a 7-1/2 month low after a former Japanese Ministry of Finance official said Japanese authorities would be unlikely to take action against the yen's rise through the psychologically key level.
Eisuke Sakakibara, vice finance minister for international affairs in 1997-1999, told Dow Jones Newswires the MoF would not be concerned by a dollar move below 90 yen but might consider action if it fell below 85 yen.
A move below 80 yen might be viewed as abnormal, said Sakakibara, who earned the nickname Mr Yen and is still considered by some to be influential.
The dollar dipped to 89.97 yen, according to Reuters data, its lowest since mid February, and down more than 1 percent on the day.
The yen rose sharply against other currencies while the trade weighted value of the U.S. dollar was down about 0.5 percent on the day. Leaders from the world's rich and developing countries, meeting in Pittsburgh, pledged to keep emergency economic support in place until a durable recovery is secured and to work together when the time comes to remove them, a draft communique obtained by Reuters showed on Friday. [ID:nN25480100]
Analysts said the communique suggested recovery in the U.S. economy would take more time and U.S. rates would stay near zero. This would restrict demand for the low-yielding dollar, even as global economic weakness kept risk demand in check.
The G20 is making clear that stimulus will stay in place until a recovery is sustainable, said Michael Klawitter, senior currency strategist at Commerzbank in Frankfurt, adding this suggested interest rates, including those for the dollar, would remain low for a while yet.
The cyclical argument has not changed to favour the dollar.
While many in the market believe a U.S. rate rise is far off, Federal Reserve Board Governor Kevin Warsh said on Thursday the U.S. central bank may have to raise rates before the need to take action becomes obvious.
By 1024 GMT, the euro was up 0.3 percent on the day at $1.4711, recovering from a fall to as low as $1.4614 earlier in the day. The European single currency hit a one-year peak of $1.4845 on Wednesday on trading platform EBS. The U.S. currency erased gains made earlier in the day, when it had rallied after major central banks said on Thursday they would jointly scale back massive injections of dollars.
FOCUS ON U.S. RATES
In an op-ed piece for the Wall Street Journal, the Fed's Warsh said that policy likely will need to begin normalization before it is obvious that it is necessary, possibly with greater force than is customary.
Many in the market anticipate the Fed will raise rates in the second half of 2010 at the earliest, but analysts said his comments suggested the central bank might raise sooner. We maintain that a substantially different FOMC statement will be forthcoming at the Nov. 4 meeting that will signal greater optimism over recovery and fuel speculation of more aggressive monetary tightening in 2010, analysts at BTM UFJ wrote in a research note.
Higher-yielding currencies, such as the Australian and New Zealand dollars, whose moves often track those of oil prices, rose against the dollar, recovering as U.S. crude prices found their footing following a 4.5 percent tumble the previous day.
The Aussie rose 0.6 percent to $0.8702, crawling back towards a 13-month peak of $0.8790 reached early this week.
Sterling hit multi-month lows against the dollar, euro and yen as traders continued to dump the UK currency a day after Bank of England Governor Mervyn King highlighted the benefits to the UK economy from a weaker pound.
The pound has been under pressure on perceptions the Bank of England may lag other central banks in ending its ultra-loose monetary policy.
Sterling was down nearly a percent against the Norwegian crown GBPNOK= at 9.2716. The Norwegian central bank held interest rates steady this week but said it had considered a rise. Some analysts expect a hike next month.
The pound fell as low as $1.5917, its lowest since early June, before edging back to $1.6008, down 0.4 percent on the day. It sank against the yen GBPJPY=R, falling as low as around 144.30 yen, its weakest since mid-May.