Dollar at lows on recession fears

The dollar is falling as investors worry about the US economy

Deepening gloom over the outlook for the US economy has helped send the dollar to its lowest level against the yen since May 2005.

By 1320 GMT the US currency was at 106.35 yen, after hitting a low of 105.97 earlier on Wednesday.

Traders received more grim news from the US banking sector as JP Morgan said quarterly profits were down 34%.

A report on Tuesday showing weak retail sales in December has added to fears of a possible recession in the US.

Everything suggests we're heading for a global slowdown Simon Derrick Bank of New York Mellon

Analysts say the stronger yen reflects a more cautious attitude among investors.

For years the relatively cheap yen was used to fund higher risk, more profitable investments elsewhere.

But that that strategy, know as the "carry trade", is now considered too risky.

"Everything suggests we're heading for a global slowdown," said Simon Derrick, currency strategist at Bank of New York Mellon.

"As traders become risk adverse they sell higher risk, higher yielding assets and get back into the yen."

Lower rates?

The dollar also hit a record low against the Swiss currency of 1.0839 Swiss Francs, but held steady against the euro at about $1.48.

Hefty losses from the US's leading banks have added to pessimism over the state of the economy and the dollar.

As well as JP Morgan, Citigroup announced a record $10bn quarterly loss on Tuesday, and losses are expected from Merrill Lynch when it reports results on Thursday.

The economic news has been weak too - on Tuesday a report showed a surprise fall in retail sales in December.

It all adds to the pressure on policy makers at the US Federal Reserve to lower interest rates.

In December, the US Federal Reserve cut interest rates for the third time in succession to 4.25% and analysts think further cuts are on the way.

That will undermine the dollar as traders move into currencies with a higher rate of return.