The dollar eased against the yen and euro on Monday, weighed down by weakness in the U.S. stock market after comments by a top Citigroup official raised anew concerns about global credit.
U.S. bond prices rose, boosted by safe-haven bids, while equities posted sharp losses, led by financial services, on Citigroup's gloomier economic outlook.
Citigroup Inc Chief Financial Officer Gary Crittenden on Monday said he was not optimistic that markets for collateralized debt obligations and other fixed-income products, hammered by this summer's credit crunch, will soon recover.
The stock market is definitely having an impact on currencies, said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.
The relationship between equity markets and the yen crosses has come back in full force and that's the primary driver today. It looks like Citigroup's comments that the credit crisis is intensifying has precipitated the stock market decline, Dolan said.
The Dow Jones industrial average was down about 0.7 percent at the end of the trading day.
Citigroup Inc and other global banks earlier said they were pooling money to prevent investment funds from having to dump assets into the market. The news initially lifted stocks, but shares later fell as the move reawakened concerns about the fallout from the credit squeeze.
The yen, which tends to fall as risk appetite increases as investors borrow cheap yen to buy higher-yielding assets, fell in response to firmer equities earlier, and the dollar hit a peak of 117.94 yen, its highest since mid-August. But the dollar slipped against the yen as stocks dropped to trade at 117.26 yen, down 0.3 percent on the day.
Also weighing on the dollar against the yen was the surge in oil prices, which jumped to an all-time high above $86 per barrel on Monday. Oil prices were propelled by strong demand from booming commodity markets.
The euro rose 0.2 percent to $1.4202, not far from its record high above $1.4280 set two weeks ago.
Against the yen, the European currency traded as high as 167.72 yen, according to Reuters data, its highest level since July 23. It last traded at 166.57 yen, little changed on the day.
The dollar weakened against a basket of six major currencies, trading 0.1 percent lower at 78.087.
With no first-tier economic data due on Monday, investors were focused on a speech by Federal Reserve Chairman Ben Bernanke on the economic outlook scheduled for 7 p.m. (2300 GMT) for a hint on the outlook for U.S. interest rate cuts.
Avery Shenfeld, senior economist at CIBC World Markets in Toronto, said he expects Bernanke to justify preemptive August rate cuts. But, like Fed Vice Chairman Donald Kohn in comments last week, the Fed chief could cast doubt on follow-up easing moves, said Shenfeld, adding that such comments would be supportive for the dollar.
Market players are also cautious about making active bets on currencies ahead of the G7 meeting later this week, with recent volatile foreign exchange moves expected to be a major topic for discussion.
European Central Bank President Jean-Claude Trichet told a Russian newspaper, which was published on Monday, that the euro's exchange rate should reflect fundamentals and excessive currency moves are bad for growth.
Data on U.S. net capital flows for August are also due on Tuesday. Although the report covers numbers from two months ago, analysts are still keenly awaiting the data and a negative outcome would further pressure the dollar.
If the U.S. (Treasury flows) data shows another black hole in U.S. balance of payments funding then the dollar could be vulnerable to further attack -- especially after the low capital inflows in July, said Bear Stearns in a research note.
(Additional reporting by Vivianne Rodrigues)