Dollar falls on Fed outlook and risk aversion

TOKYO: The dollar hit a record low versus a basket of major currencies on Friday after soft US data and weak earnings from the No 2 US bank bolstered expectations for the Federal Reserve to cut interest rates.

The dollar also slumped to a three-week low against the yen as a slide in Japanese equities pointed to an ebbing of risk appetite and encouraged unwinding of risky bets against the low-yielding yen. As traders braced for a meeting of Group of Seven finance ministers in Washington later on Friday, a slump in the Nikkei share average helped the yen gain a leg up on the dollar and high-yielding currencies.

"There is some wariness hanging over the market," said Akira Kato, senior manager for Bank of Tokyo-Mitsubishi UFJ's foreign exchange trading department. "That is leading to some moves akin to risk aversion and buybacks of the yen," Kato said. Investors are concerned about the outlook for Chinese and Indian shares, and a fall in Japanese share prices on Friday was adding to the jittery sentiment, he said.

The dollar was at 115.05 yen after falling as low as 115.01 yen on electronic trading platform EBS, the lowest since early October. The euro inched up to $1.4304 hovering near a record high of $1.4311 hit on EBS on Thursday. The dollar index, which measures the dollar's performance against a basket of major currencies, dipped to a record low of below 77.460 Indian shares fell sharply earlier in the week after India's stock market watchdog proposed that there should be urgent curbs on the flow of foreign funds into shares through instruments known as participatory notes.

EYES ON G7

Bank of America reported a much larger than expected 32 percent drop in quarterly profit on Thursday on the back of mounting credit losses, fanning concerns that a global credit squeeze is far from over.

That, together with data showing surprising weakness in the US job market and regional manufacturing activity helped rekindle expectations that the Fed may cut interest rates from the current 4.75 percent this month.

US short-term rate futures now imply a roughly 70 per cent chance of the Fed cutting interest rates by 25 basis points to 4.50 per cent at its monetary policy meeting on October 30-31, up from around 30 to 40 per cent earlier in the week.

In addition to heightened risk aversion, caution ahead of a meeting of Group of Seven finance ministers in Washington later on Friday was lending support to the low-yielding yen, traders said. Speaking ahead of the G7, Europe's economic chief stepped up pressure on China to take action to strengthen its yuan currency as Europe's imports from the Asian economic giant surge.

Joaquin Almunia, the European Union's economic and monetary affairs commissioner, also cautioned against overly volatile moves in currencies said that the weakness in the yen did not reflect economic fundamentals and was aggravated by carry trades.

Separately, Japanese Finance Minister Fukushiro Nukaga said in Washington that G7 finance ministers and central bankers would naturally discuss currency issues when they exchanged views on global economic conditions.