Dollar Regains Upper Hand As Risk Appetite Abates

The U.S. dollar was higher against most major currencies Friday, regaining the upper hand as concerns about the global economic outlook curbed investor appetite for riskier assets.

But the dollar's gains were hardly dramatic. Traders noted major currency pairs remain largely range-bound.

"It feels like we're already in the summer doldrums," said Daragh Maher, currency strategist at Calyon Bank.

Markets for now are hung up by uncertainty over the shape of any future economic recovery, he said. Economic data at this point "can be spun either way," likely leaving currency markets next week to key off of any earnings surprises from U.S. companies.

In economic news, U.S. consumer sentiment fell sharply in early July, according to a survey released Friday by the University of Michigan and Reuters, breaking a string of increases and underscoring the still-weak state of the economy.

Sentiment fell to 64.6 from 70.8 in June, much lower than the level of 70.5 pegged in a survey of economists by MarketWatch.

The dollar index (DXY), a measure of the greenback against a trade-weighted basket of six major currencies, recently traded at 80.240, up from 79.879 in late North American trading on Thursday.

On Wall Street, U.S. stocks finished mostly lower. The S&P 500 stock index (SPX) fell 0.4% to 879.13 points.

"Given the sour mood on Wall Street this past week, we suspect the odds for further stock losses are decent, and if this bears out, the greenback can be expected to continue its recent trend of rallying versus the euro and commodity currencies, while losing ground to the yen," said analysts at Action Economics.

The euro bought $1.3935, down from $1.4036 late Thursday. Earlier in the session, the euro hit an intraday low of $1.3876.

The euro fell "on a report from the German media that there are at least 10 Eastern European nations that are talking to the IMF about emergency loans," wrote analysts at BMO Capital Markets.

The report was published in Germany's Handelsblatt newspaper, which said that Bulgaria, Croatia and Macedonia are among the countries negotiating with the IMF.

In other currencies trading, the dollar was up 0.9% to 8.1830 South African rand on Friday.

Dollar slips vs. yen

The dollar bought 92.37 Japanese yen, slipping from 92.99 yen Thursday. The dollar tumbled to 91.81 yen Wednesday, its lowest level versus a broadly higher Japanese currency in more than four months.

Maher noted that the yen was one exception to this week's range-bound activity, crediting its surge to a break through key technical levels.

The yen looks set to maintain its momentum going into next week, said Kenneth Broux, market economist at Lloyds TSB.

"With participants set to tread carefully and pondering over possible earnings surprises from the U.S. banks next week, and [Ministry of Finance] data showing strong buying of [Japanese government bonds], it is hard to see the Japanese yen dramatically reverse its bullish set-up in the near term," he said.

The Bank of Japan is scheduled to hold a regular policy meeting next week, and could extend some of its programs designed to add liquidity to the nation's financial markets.

The British pound recently traded at $1.6198, down from $1.6338 late Thursday.

Sterling was boosted Thursday after the Bank of England surprised markets by not expanding the size of its quantitative easing program from its current level of 125 billion pounds ($202 billion).

In Italy, leaders of the Group of Eight economic powers wrapped up a three-day summit that broke little new ground on the economic front.

Officials of the Group of Five emerging economies, which include China and India, met with G8 leaders on Thursday.

Chinese officials reiterated their call for a re-examination of the dollar's role as the world's primary reserve currency, but the remarks caused no major ripple in currency markets.

British Prime Minister Gordon Brown and German Chancellor Angela Merkel played down the remarks, noting they weren't part of official G8 discussions.

"We had comments from the Chinese, but they were nothing we haven't already heard," Maher said.