The dollar fell to a 2009 low on Friday as fears intensified that the United States could lose its triple-A rating, while renewed caution about the world economy and banks prompted Asian and European stocks to slip.
The dollar's latest decline started when ratings agency Standard & Poor's cut its ratings outlook on Britain to negative from stable, stoking fears other AAA-rated countries which are running huge debt levels could share a similar fate.
Moody's Investor Service said on Thursday it was comfortable with its triple-A sovereign rating on the United States but that it was not guaranteed forever.
The main issues are related to yesterday's movement on fears that the U.S. might lose its triple-A rating, said Roberto Mialich, FX strategist at Unicredit in Milan.
This exacerbated the dollar's losses over the last few days ... (and) for the time being it's hard to imagine a sharp reversal of the dollar's trend.
The dollar index <.DXY>, which measures the currency's strength against major trading partners, fell 0.3 percent to its lowest since late December, before steadying.
The index is on track for its biggest weekly drop in two months, when the Federal Reserve launched its large-scale purchases of U.S. Treasuries in late March.
Minutes of the Fed's April meeting, published this week, showed it considered buying more securities to spur recovery, a move which would inject more dollars into the market.
The FTSEurofirst 300 index <.FTEU3> fell a third of a percent, led by weaker banking shares, and Japan's Nikkei closed 0.4 percent lower <.N225>.
The underlying economics are beginning to move to the fore once again, following an almost euphoric run up over the past two months, said Chris Hossain, senior sales manager at ODL Securities.
MSCI world equity index was up 0.2 percent. Emerging stocks <.MSCIEF> rose 0.12 percent.
U.S. crude oil rose 1 percent to $61.66 a barrel, close to the previous day's six-month high above $62.
June Bund futures fell 96 ticks.
Money markets showed further signs of easing tensions.
Dollar short-term lending rates hit a new record low in Asia, extending their drop and indicating an abundance of cash pumped in by central banks.
Three-month dollar funding rates in Singapore dropped to 0.66667 percent, extending a steady downtrend that has more than halved the cost of funds since the end of March.
There were also signs pointing to a global recovery later in the year.
The Bank of Japan signaled that the worst of the global crisis may be over for the world's second-largest economy, which shrank at a record pace in the first three months of the year.
After a two-day policy meeting, the central bank said it had upgraded its view on the ailing economy, saying conditions were still deteriorating but noting that steep declines in exports and output appeared to be leveling out.
We expect the sharp declines in the fourth and first quarters to give way to a period of more uneven (but still weak) performance over Q2 and Q3, Credit Suisse said of the global economy in a note to clients.
We still envision sustained growth in real GDP commencing around the fourth quarter of this year as money, credit, and fiscal stimulus gain traction.
(Additional reporting by Jamie McGeever, editing by Mike Peacock)