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Dollar falls, risk aversion lifts yen, Swiss franc

NEW YORK - The yen hit a three-week high against the dollar on Friday and rebounded from a record low against the euro as investors reduced risk exposure amid record high oil prices, slumping stocks and fears about U.S. growth.

The Swiss franc, a traditional safe haven, also benefited, while the euro headed for its second straight week of gains against the dollar as tepid U.S. economic data undermined the case for the Federal Reserve to hike interest rates by August.

"We've seen the high-frequency U.S. data disappoint, and it may be a while before you see a genuine recovery in the U.S. economy," said Paresh Upadhyaya, who helps manage $50 billion in currency assets at Putnam Investments in Boston.

With the oil price hitting a record above $142 and up more than 47 percent so far this year, the combination of sluggish growth and high prices has battered U.S. stocks, sent bond yields lower and put pressure on the dollar.

"Markets are taking out their aggressive Fed rate hike assumptions, and the dollar has weakened as a result," Upadhyaya said.

Low-yielding currencies such as the yen did well on Friday as losses in global equity markets dulled risk appetite. The dollar fell to 106.08 yen, a three-week low, before edging up to 106.20. The euro shed 0.6 percent to 167.26 EURJPY, a sharp slide from a record high of 169.45 yen touched on Thursday.

The dollar hit its lowest level against the Swiss franc since June 9 at 1.0168 francs before rebounding to 1.0197 francs. The franc also rose after Russia's central bank said it plans to increase the currency's share in its $558.7 billion gold and foreign exchange reserves.

"There is a bout of risk reduction across assets," said Martin McMahon, foreign exchange strategist at Credit Suisse in Zurich. "It's probably got further to run, and being in the Swiss franc is a good place to be, and in the yen to a certain extent as well."

The euro was little changed against the dollar at 1.5753 EUR but was up 0.8 percent on the week, on track for its second consecutive week of gains.

Fed steady, ECB looks set to hike

Data showing U.S. consumer sentiment fell in June added to the gloom surrounding the greenback, as did fear of more credit losses that weighed on U.S. stocks.

Separate data, though, showed U.S. consumer spending jumped last month as tax rebate checks boosted household budgets, while core inflation, which strips out energy and food, eased.

The Fed left interest rates on hold at 2 percent on Wednesday, and while it said inflation risks have increased, it did nothing to convince markets of an imminent rate hike.

The European Central Bank, by contrast, has all but assured markets that it will raise its refinancing rate from 4 to 4.25 percent to rein in rising prices when it meets next week.

Inflation remains a top concern across the 15-country euro zone: Spanish consumer price inflation hit a record high of 5.1 percent in June, while inflation rose in five German states.

Deutsche Bank currency strategist Binky Chadha said in a research note that the U.S. and euro zone economies have seen similar gains in inflation and inflation expectations.

"But underlying labor cost trends have diverged markedly, falling in the U.S. and rising in the euro area, which should keep the ECB hawkish even as growth slows," he wrote.

The euro has traded in a broad $1.53-$1.58 range for about two months. Putnam Investments' Upadhyaya said slower growth means it is unlikely to retest all-time highs above $1.60 without "large deterioration in the U.S. economic outlook that pushes U.S. yields lower."

"Weak U.S. fundamentals will prevent a euro sell-off, while at the same time, euro strength will be hindered by the potentially weaker euro zone growth," he said.