Dollar rallies as stock markets recover; yen down sharply

The dollar advanced on Friday, posting sharp gains against the safe-haven yen as stock markets recovered globally and investors cheered efforts made by governments and policymakers to address the economic fallout from the coronavirus outbreak.

The greenback extended gains against several currencies after a blowout in swap spreads on Thursday signaled that investors want dollars. While those spreads came in on Friday, the dollar held strong.

But market participants said signs of dollar funding stress persist and policymakers probably need to do more.

"Underlying concerns regarding the economic fallout from the coronavirus on credit markets broadly remain," said Shaun Osborne, chief FX strategist, at Scotiabank in Toronto.

"It may be tempting to look for signs of a low in global stocks but with the underlying issue - the coronavirus - still unchecked, we think that is premature at this point," he added.

He noted that the cost of raising US dollar funds in the cross-currency euro swap market has widened again on Friday after narrowing the day before on the Federal Reserve's announcement to inject more liquidity into the banking system.

Wider spreads in the cross currency basis swap market suggested increased signs of US dollar shortage for corporates seeking funding.

In mid-morning trading, the dollar gained 2.2 percent against the yen to 106.94 JPY=. It also rallied versus another safe haven, the Swiss franc, rising 0.9 percent to 0.9508 franc CHF=.

Against a basket of currencies, the dollar rose 0.6 percent to 98.085 =USD.

The euro, meanwhile, nursed losses despite European Central Bank policymakers trying to reassure markets. European assets sold off on Thursday after investors were underwhelmed by the bank's stimulus measures. It was last down 0.5 percent at $1.1125 EUR=.

The ECB on Thursday announced a stimulus package that provides loans to banks with rates as low as -0.75 percent and increases bond purchases, but it did not join its counterparts in the United States and Britain by cutting rates.

ECB President Christine Lagarde aggravated a market sell-off by saying it was not the central bank's job to close the spread between the borrowing costs of various members, comments that she later tried to roll back.

The pound GBP=D3 also weakened 0.3 percent against the dollar to$1.2510.

The greenback's rebound this week reflects its role as the world's most liquid currency, which investors seek in times of stress.

The Fed meets next week and many analysts now expect the central bank to chop its own target policy rate, quite possibly to zero, and give markets new guidance about how it plans to combat the economic fallout from the coronavirus.

The Australian AUD=D3 and Canadian dollars bounced on Friday after getting mauled on Thursday as investors shunned riskier currencies that are linked to the global commodities trade.