The US dollar gained ground against most major currencies on Friday, as risk aversion resumed among investors and after worldwide equity share prices continued their decline amid fears of a possible global recession. The greenback was also boosted by month-en demand from global fund managers seeking to rebalance foreign exchange hedges in their portfolios. The dollar trimmed losses against the yen on Friday after a US consumer confidence report for October came in broadly in-line with market expectations. Spending by US consumers, however, dropped more than forecast in September, capping its weakest quarter in three decades and signaled the economy will continue to slump in coming months.
The euro fell against the US dollar as inflation in euro zone slowed to the lowest since January and as risk aversion returned to the markets. With the release of this new inflation report, speculation has continued to mount that the European Central Bank will continue to lower borrowing costs, the next ease most likely next week. European shares also stumbled after Japan's Nikkei stocks average shed 5 percent on Friday.
Sterling weakened against a broadly stronger US dollar on Friday, with resumed risk aversion in the markets, while data showed the global financial crisis weighing heavily on British consumer morale. According to a survey released earlier on Friday, British consumer confidence slipped in September, as fears about banks' stability and the state of the economy deepened. Sterling should continue to be pressured as risk aversion in the markets and a negative fundamental outlook for the UK make it a losing currency among other major currencies. Expectations continue to run high that the Bank of England will deliver another aggressive rate cut next week.
The Japanese yen steadied versus the US dollar and strengthened against other major currencies as risk aversion returned to the markets. As expected, the Bank of Japan cut interest rates, however only by 20 basis points which was not in line with market expectations. Financial markets took little comfort in the Bank of Japan's interest rate cut, their latest monetary policy initiative after central banks in the United States, China, and other countries lowered rates this week to stem the negative impact of the credit crisis on their respective economies. The Nikkei average posted its biggest ever monthly fall in October, dropping 5 percent after the BoJ eased rates. The reluctance of the BoJ to join the more aggressive moves of the Fed is hitting risk appetite and pushing the yen higher.
The Canadian dollar weakened versus the US dollar on Friday, hurt as equity markets fell due to renewed fears of global recession. The Canadian dollar has taken its cue from equity markets in recent sessions, rising when investors decided to take on riskier assets and falling as recession concerns convinced investors to liquidate assets and buy US dollars.
The Australian dollar lost ground on Friday on mounting worries of a sharp global economic downturn. This drop put the Aussie on track for its worst monthly performance since it was floated in 1983. The New Zealand dollar resumed its descent from last week as investor nerves about risk reappeared.
Given the mood in the markets and risk fears, the trend for both the Aussie and Kiwi will be lower in coming months.
The Mexican peso steadied against the US dollar as a new report showed Mexico’s economy expanded by 1.7 percent in the third quarter at an annual rate, renewing confidence in the currency.
