The dollar fell against the yen and the euro on Friday as a deal to rescue the U.S. financial system stalled, souring hopes for an imminent agreement to resolve the banking crisis.

U.S. lawmakers had appeared close to a final agreement on Thursday on a massive $700 billion bailout to save the financial system, but things spun off course during an emergency White House meeting between Congressional leaders with U.S. President George W. Bush.

Negotiations toward a Wall Street bailout fell into disarray late on Thursday after Republican president candidate Sen. John McCain backed a new plan differing markedly from the one that has been under discussion.[ID:nN25133375]

Congressional leaders said an agreement could take until the weekend or longer, sending U.S. stock futures down sharply in Asian trading, hurting the dollar.

“The change in the mood about the imminent agreement on the U.S. bailout plan is adding to the weakness of the dollar against the yen,” said a trader at a Japanese bank.

News that Washington Mutual was closed by U.S. authorities and its assets sold in America’s biggest ever bank failure also hurt the sentiment towards the greenback.

The third-largest U.S. bank JPMorgan Chase & Co said it bought the deposits of Washington Mutual which has seen its stock price virtually wiped out because of massive amounts of bad mortgages.[ID:nSP335584]

The dollar fell 0.6 percent to 105.87 yen, near day’s low, but stayed in a rough range of 105-108 yen this week.

Traders said selling came mostly from speculators who create and close positions in the short term, while many investors avoided big directional bets in recent volatile sessions.

“The market is not in a state where we can analyse economic fundamental factors and create bets accordingly. Price movement is too choppy,” said Haruhisa Takagi, head of forex spot trading group at Sumitomo Mitsui Bank.

The euro rose 0.4 percent to $1.4670. Against the yen, the euro dipped 0.2 percent to 155.37 yen.

Traders said comments from Dallas Fed President Richard Fisher also put downward pressure on the dollar. Fisher said on Thursday the danger of a financial meltdown makes the need for higher interest rates less urgent.

Fisher’s comments came after data on Thursday painted a bleak picture of the U.S. housing and labour markets, reinforcing market participants’ views that even a massive bank rescue may not be enough to avert a recession.

The New Zealand dollar jumped 1 percent to $0.6873 after data showed the economy contracted in the second quarter, but by less than the market had forecast.

Still, the data confirmed New Zealand fell into recession for the first time in more than a decade, backing expectations of more interest-rate cuts this year and undermining the kiwi’s strength in longer-term.

The market showed limited reaction to data showing Japan’s core annual consumer inflation stayed at a decade high of 2.4 percent in August, matching a market forecast.[ID:JPCPI=ECI]

Source: http://www.afxnews.com

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