Two-year US bond yields fell to a three-year low while investors shunned the dollar in favour of the yen on Friday as a newspaper said Merrill Lynch will report further heavy losses related to the credit crisis.
The dollar fell 0.3 per cent against the yen while the two-year US Treasury yield eased to its lowest level in three years around 2.62 per cent.
The New York Times said Merrill is expected to suffer $15 billion in losses from soured mortgage investments, a reminder to investors the jury is still out on the extent of the fallout from the credit crunch.
European stocks, which in the previous session came under pressure as both the European Central Bank and the Bank of England kept rates on hold, fell 0.3 per cent.
Earlier, Japan's benchmark Nikkei fell to its lowest close since November 2005.
Federal Reserve Chairman Ben Bernanke on Thursday acknowledged the US economy faced increased risks and indicated the US central bank was ready to cut interest rates aggressively to support growth.
But the Merrill report was at the forefront of investors' minds, adding to widespread risk aversion.
The yen was up 0.6 per cent against the euro while the Swiss franc -- traditionally seen as a safe-haven currency -- traded up 0.3 per cent against the euro.
"Every bit of news may (add to) risk aversion and be negative for the equity market," said Carole Laulhere, currency strategist, Societe Generale, Paris.
As well as Merrill, big names such as Citigroup, State Street, US Bancorp and JP Morgan report results next week.
Investors will be looking closely at the results to see how the recently downbeat sector is faring especially as recent data, such as last week's key U.S. jobs data, has fuelled fears the world's largest economy may be on the brink of recession.
Such concerns have even knocked oil prices off last week's record highs of just above $100 a barrel. US crude last traded up on the day at $94.33 a barrel.
Fears about global growth have weighed on global stocks this year with the FTSEurofirst 300 index down nearly 5 per cent so far in 2008 while S&P had one of its worst-ever starts to a year.
Weakness in consumer sentiment numbers globally and some disappointing figures from retailers have also fuelled concerns over the impact of the credit crisis on the real economy.
Some analysts say the only solution is further rate cuts -- hopes that helped gold prices hit fresh record highs on Friday near $900 an ounce.
But markets are still cautious even after Bernanke's comments.
"While Bernanke appeared to be in generous mood in terms of prospects for cutting rates, market psyche is such at present that the general take is that his turnaround must suggest that he knows something that we all don't, i.e. that the US economy is in much worse shape than we have all been hitherto assuming," said Bear Stearns in a client note. (Reuters)
Merrill report spreads more gloom on dollar, stocks