The dollar bounced back on Friday as investors, becoming nervous about market volatility after the deadly bombings in Madrid, dumped the euro and other high-yielding currencies they had piled up over many months. Also supporting the dollar was growing doubts about the credibility of a letter purportedly from al Qaeda claiming responsibility for the blasts in three Madrid train stations and warning of attacks on the United States. The letter, e-mailed to the London-based al-Quds al-Arabi newspaper, sent the dollar reeling and U.S shares plummeting on Thursday. "Everybody is moving to close their positions before thinking about what to do next," said a trader at a Canadian bank in Tokyo. As of 0630 GMT, the euro was around $1.2260 , down about 0.7 percent from late U.S. levels around $1.2355. The dollar also rebounded sharply versus the Swiss franc, a traditional safe-haven currency, to around 1.2775 francs , up one percent from late U.S. levels and from its 10-day low of around 1.2650 hit in early Friday trade. The dollar also firmed versus the Japanese currency to 111.15 yen , up 0.3 percent, helped by persistent wariness about Japan's dollar-buying intervention.
Traders said the market's outlook was clouded by confusion over who was behind the Madrid bombings, which killed at least 192 people. "The market still doesn't know if the letter was really sent by al Qaeda," said Mitsuru Sahara, vice president of the forex dealing group at UFJ Bank. Traders said if it turns out that the bombings were carried out by Basque separatists as the Spanish government says, the euro could come under more pressure. Some said the yen could falter as the letter also issued a warning to Japan as well as other countries that supported the U.S.-led war against Iraq last year. "Investors may become more risk averse after this," said Shogo Nagaya, forex manager at Nomura Trust and Banking. "What that means is harder to know. It could mean selling of stocks or unloading of long positions in high-yielding currencies," he added. Indeed, high-yielding currencies continued to suffer on Friday. The Australian dollar fell more than one percent to a three-month low of $0.7250 . The British pound also fell nearly one percent to around $1.7955 .
HESITANT ON DOLLAR
Still, many traders became hesitant about buying the dollar, which was not good timing for a currency that has been showing signs of recovery from a two-year downtrend in recent weeks. The dollar has been recovering from record lows against the euro and multi-year lows versus other currencies since February. "With dollar sentiment deteriorating on geopolitical worries, a weak reading in upcoming indicators could accelerate the dollar's fall," said Junya Tanase, forex strategist at JPMorgan Chase. The U.S. current account for the October-December quarter is to be released at 1330 GMT. Its deficit is expected to stay around $135 billion, compared with $136.5 billion in the third quarter. That will be followed by the University of Michigan's consumer sentiment index at 1445 GMT. The index is seen subdued at 95.0, compared with 94.4 in February.///