Trading across global markets remained volatile on Thursday, and the nerves of investors were tested by dollar weakness and continued worries about the deteriorating health of the financial system.
The collapse of a mortgage hedge fund run by Carlyle Group and rumours of financial problems at a big US bank compounded the bleak sentiment and contributed to illiquid trading in many parts of the capital markets.
The dollar plumbed record lows against the euro and Swiss franc and a 12-year trough against the yen amid growing concerns that the US economy has descended into recession.
Dollar weakness triggered a flight from Asian and European equities into the havens of government bonds and gold, with the yellow metal hitting $1,000.45 an ounce for the first time. Crude oil hit $111 a barrel before dropping back.
On Wall Street, an early slide in stocks, which pushed the S&P 500 down as much as 2 per cent, was countered by an afternoon rally and the benchmark index closed up 0.5 per cent.
The rebound in stocks was matched by a pullback in the US credit market and a reversal of safe haven flows in Treasury bonds. Relief came as Standard & Poor's predicted writedowns from exposure to subprime mortgages may be approaching a bottom.
"Markets are on a rollercoaster ride and despite the best efforts of the Federal Reserve we still face further deleveraging from investors," said TJ Marta, strategist at RBC Capital Markets.
On currency markets, the dollar had pared some of its losses late in New York after a torrid overnight session. The dollar sank to Y99.77 against the Japanese yen, its first fall below Y100 in 12 years, and it came within half a centime of parity with the Swiss franc, reaching a record low of SFr1.0047. The euro climbed to a new record high of $1.5624.
"The broad story is one of dollar weakness and people who are negative on the dollar and risk are expressing that view through the yen and the Swiss franc," said Alan Ruskin, chief international strategist at RBS Greenwich Capital.
The dollar plumbed new lows as Tuesday's efforts by central banks to add liquidity to parched money markets failed to convince investors that financial market stresses were being adequately dealt with.
Indications were that US interest rates would have to fall further. Lehman Brothers changed its forecast for next week's Fed meeting and now expects a cut of 75 basis points in the Fed funds rate to 2.25 per cent.
"The Federal Reserve will not sit back and watch the economy or financial markets collapse. If at first they don't succeed, we believe they will try, try again," said Drew Matus, economist at Lehman, who noted "the Fed's new STLF has not provided the level of support to the market that we would have hoped."
However there is concern about the ramifications for hedge funds and other investors as the Fed's planned new liquidity measure starts at the end of the month.
"Whereas before non-deposit taking broker/dealers might have been willing to help distressed funds stay afloat to avoid being left with illiquid assets they could not sell at good prices, now they can effectively exchange those assets for Treasuries," said analysts at BNP Paribas. "With this incentive to support hedge funds facing liquidity problems removed for broker/dealers as well as banks, we may start to see more hedge funds coming under pressure."
Further evidence that the US was close to - if not already experiencing - recession was provided by US retail sales data, which fell more sharply than expected in February as power, heating and petrol bills rose.
Rob Carnell at ING said: "Following two consecutive months of negative payrolls, about the only box remaining to be ticked before the US recession can be confirmed 'official' was some weaker spending data. We consider that box well and truly ticked now."
The dollar's fall pushed gold to $1,000 an ounce, as investors sought refuge in commodity markets. "As long as investors remain worried about the outlook for the US economy, gold will be a popular safe-haven choice," said James Hughes at CMC Markets. Late in New York spot gold was at $993.30 an ounce, while crude oil closed up 28 cents at $110.20 a barrel.
Oil prices also reached new records despite Wednesday's data showing a much bigger increase in US crude stockpiles. Nymex West Texas Intermediate swung violently through the session. It hit a record $111 a barrel after the dollar slipped in response to the weak US retail numbers. Brent crude hit a new high of $107.88.
European and Asian equity markets fell sharply, particularly in the sectors that rely on dollar earnings as investors feared slowing revenue growth from exports to the US.
"The run on the dollar and its knock-on effect in whipping up both commodities and US inflation will be worrying the Fed," said Edward Meir at MF Global. He added: "The sagging dollar is boosting US exports, but it will eventually throttle exports from Europe and Japan."
The FTSE Eurofirst 300 was 2.7 per cent lower at its worst but halved its losses after the Standard & Poor's report on subprime writedowns. The Eurofirst 300 ended 1.3 per cent lower at 1,268.46.
Tokyo's Nikkei 225 Average lost 3.3 per cent to 12,433.44, led by steep falls in automobile stocks and computer game console makers.
Credit spreads were wider in response to the volatile conditions. The CDX North America investment grade index rose 16bp to a record 198bp and was at 189bp in late trade. The iTraxx Europe index of investment-grade credit reversed Wednesday's rally, widening 16bp to 160bp - also close to a record.
A poor sale of new 10-year Treasury notes and the recovery in US stocks stemmed safe haven buying of US government bonds. The yield on the 10-year Treasury rose 5bp to 3.53 per cent. The two-year note yield was down 2bp at 1.61 per cent, after making an early low of 1.48 per cent.
UK gilts rose, reversing some of the price action seen on Wednesday in response to the government's announcement of a record pound 80bn bond issue in the next fiscal year.