Volatile dollar takes a respite

US dollar wandered on either side of break even against major currencies on Friday. This gave recent unstable swings a break.

The euro bought $1.3412, down less than 0.1% from $1.3445 on Thursday. The British pound fell to $1.728, just slightly lower than the $1.73 it bought the previous day.

The dollar also verge a bit lower against the Japanese yen Friday, down 0.02% on Thursday. The dollar’s break follows weeks of tumultuous ups and downs which coincided with wild swings from the stock market, tightening credit and more signs that US economy is going to recession.

Major housing indicator showed initial construction of homes sinking to another 17-year low thus pushing the dollar slightly lower than the yen.

Yen rising due to investors

When investors show dislike to risk, the yen typically increases as many traders view it as a more stable currency in times of economic turmoil.

Wall Street also seem to be taking a break from the recent daily roller-coaster moves, leaving currency traders anxious over what might be the next thing to drop for the economy.

"Currency volatility has been very high recently, which means that there are a great number of fundamentals at play," said Antonio Sousa, chief currency strategist with Forex Capital Markets. "There may be a small pullback today, but that doesn't mean tomorrow won't be more volatile."

This recent fall out from credit crisis is making traders search for safety. With the dollar still considered a relatively steady currency, many choose to invest in U.S. Treasury and dollars.

"The biggest credit bubble in history is bursting, and it's affecting the entire global financial system," said Sousa. "The U.S. dollar is considered the world's reserve currency, so it has received help from the recent flight to quality."

But with stocks falling and oil prices tumbling, the dollar may face some trouble ahead. Deflation - falling prices for U.S. consumer products - which many say could have disastrous effects on the dollar's global status, are what economists are worried about

"Deflation could bring the dollar away from its world-reserve status," Sousa said. "The U.S. is able to borrow so much from other governments now, but if the greenback loses its status, that would be threatened, and we may see a sharp depreciation of the dollar."