By Deborah Levine & Simon Kennedy, MarketWatch
NEW YORK (MarketWatch) -- The dollar advanced for a fourth day versus the Japanese yen and gained on the British pound and other major currencies on Friday as U.S. equities declined, taking the wind out of sails for investors piling into riskier assets.
The dollar also rose for a third day versus the euro.
"The rally in risk assets looks like it is stalling and people are thinking it's an overstretched market," said Brian Dolan, a currency strategist at Forex.com. "We all just have to take a step back every now and then."
The pound dropped 1.6% against the dollar after an unexpected drop in gross domestic product in the United Kingdom, raising concerns about the possibility of further quantitative-easing measures.
The dollar index (DXY 75.38, +0.29, +0.39%) , a measure of the U.S. unit against a trade-weighted basket of currencies, rose to 75.386, up from 75.047 in North American activity late Thursday.
The euro traded at $1.5017, compared to $1.5023 Thursday.
The dollar rose to the highest in a month against the Japanese yen, recently fetching 91.98 yen, up from 91.36 yen on Thursday.
The dollar's stemmed from traders reversing bets that the dollar would continue falling, said analysts at Action Economics.
Both currency and stock markets shrugged off a report showing resales of U.S. houses jumped 9.4% in September to a seasonally adjusted annual rate of 5.57 million, the highest in more than two years and more than analysts' predicted. See more on home sales.
"As we close in on the end of the period in which one can successfully close on their home in time to qualify for the first-time home buyers' credit, a tick higher for the month is not surprising at all and entirely within reasonable expectation levels," said Dan Greenhaus, chief economic strategist at Miller Tabak, in emailed comments.
Stocks also extended a decline after the data, signaling to currency traders a reduction in risk appetite that had tended to support the dollar for many months. The Standard & Poor's 500 Index (SPX 1,081, -11.98, -1.10%) fell 0.5% in recent action and is poised to end the week flat despite many companies reported earnings that beat expectations.
Pressure on the pound
Byond the big three currencies, the British pound plunged after data showed the U.K. recession had unexpectedly extended into a sixth straight quarter. Data showed that the U.K.'s GDP dropped 0.4% in the third quarter, compared to expectations that it would rise 0.1%. See story on U.K. GDP.
The pound's weakness reflected expectations that the Bank of England may have to continue with its asset-purchasing program and that interest rates will remain low for a longer period.
"With just under two weeks to go until that decision, today's dismal GDP reading will certainly tip the market consensus odds from a pause in quantitative easing to an increase in quantitative easing, and this is likely to weigh on the pound considerably," said Stephen Gallo, head of market analysis at Schneider Foreign Exchange.
There had been speculation ahead of the GDP data that the central bank could soon start to withdraw some of its monetary stimulus.
"With the Bank of England set to publish its inflation report and re-assess quantitative easing in November, an extension of the asset purchase facility is on the cards," said Charles Davis, senior economist at the Centre for Economics and Business Research.
Davis added he expects asset purchases to reach 250 billion pounds, from the current level of 175 billion pounds, and for U.K. interest rates to remain at 0.5% through 2010 and into 2011.
The British pound traded at $1.6355 versus the U.S. dollar. It was sharply lower against other major currencies, with the euro gaining 1.5% at 0.9186 pounds.
