The dollar rose on Friday, extending the previous day's gains as investors retreated from riskier assets, taking the shine off higher-yielding currencies such as the Australian dollar.
Tokyo's Nikkei average fell 0.5 percent on Friday and logged its first four-week losing streak in over a year after the U.S. S&P 500 index suffered its worst one-day percentage fall in three weeks on Thursday. U.S. futures SPc1 were lower on Friday.
Risk aversion seems to be dominating at the moment and may continue to do so, said Stuart Bennett, currency analyst at Calyon. That said, there hasn't been much by way of new information to induce a fresh wave of uncertainty.
Investors pared dollar short positions, while the greenback was also supported as banks parked funds into safe-haven assets such as U.S. government bonds.
Rates on short-dated U.S. government paper fell on Thursday, with the 2-year bond yield falling to the year's low of 0.68 percent. Three-month bills traded near 1 basis point and six-month bills fell to near record lows, traders said.
That was largely due to funds booking profits and parking their cash in U.S. government bonds to window-dress their books ahead of closings at the end of this month and next.
The dollar index was up 0.6 percent on the day at 75.770 .DXY, well above a 15-month low of 74.679 touched on Monday.
By 1205 GMT, the euro was down 0.6 percent at $1.4823 EUR=, still with talk of double-no-touch options at $1.48-1.51 rolling off later on Friday.
Markets showed little reaction to European Central Bank Governor Jean-Claude Trichet who said it was too early to declare the financial crisis was over.
The yen gained broadly, with the euro at 131.91 yen EURJPY=R, breaking below its 200-day moving average of around 132.10 yen.
The dollar was flat against the yen, but remained under pressure as short-term speculators tested its downside. It was at 88.99 yen JPY=, still within reach of a six-week low of 88.63 yen hit on trading platform EBS the previous day.
Reaction was muted as the Bank of Japan kept interest rates at a record low 0.1 percent as expected, and upgraded its assessment on the economy. That was in contrast to the government who said the economy had fallen back into mild deflation.
BOJ Governor Masaaki Shirakawa said there was no change in the central bank's stance on maintaining very low interest rates to support the economy.
The government's decision to officially state now that the economy has fallen into deflation is likely an attempt to increase pressure on future BOJ policy decisions to ease monetary conditions further, said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ, and that could weaken the yen next year.
The government's desire for the BOJ to ease monetary policy further to combat deflation risks stems also from the fact that the room for additional fiscal stimulus is limited, he added.
The Australian dollar AUD=D4 was down 1.2 percent at $0.9078 while the New Zealand dollar fell 1.4 percent to $0.7208, both at two-week lows against the U.S. dollar.
They were also both on track for a roughly 3.0 percent decline on the week.
Activity may be thin next week with a Japanese national holiday on Monday and U.S. Thanksgiving day on Thursday.