WORLD FOREX: Dollar Pares Gain As Dubai Default Fears Subside

NEW YORK (Dow Jones)--Overnight gains in the dollar and the yen were trimmed early Friday in New York when global stocks and commodities recouped some losses as the worst fears about the Dubai debt crisis appeared to subside.
Market volatility calmed when many European banks and governments around the world indicated their exposure to state-run Dubai World's debt isn't as large as initially believed. Investors had fled riskier assets earlier in Asian and European trading due to intensified fears that a debt default by Dubai World would derail global financial markets and choke off an incipient economic recovery.
"For now the market is taking the view that the Dubai debt issue may be a storm rather than a hurricane," said Jane Foley, a research director at Forex.com in London.
Early in New York, the euro was trading at $1.4910, down from $1.5009 late Thursday, according to EBS via CQG. The dollar was at Y86.57, little changed frown from Y86.49, while the euro was at Y129.03, down from Y129.74. The U.K. pound was at $1.6394, down from $1.6499. The dollar was at CHF1.0112, up from CHF1.0038.
The Dollar Index, which tracks the greenback against a trade-weighted basket of six currencies, was at 75.283, up from 74.799.
With the rush to safe-haven assets abating, there is a feeling that the euro, the U.K. pound and the Australian dollar might be looking cheap right now, said Foley.
Trading is likely to remain thin and volatile as most investors in the U.S. choose to take a long weekend break after the U.S. Thanksgiving holiday Thursday. Both U.S. equity and bond markets have abbreviated sessions Friday.
"Unfortunately, thin trading conditions in the U.S. will mean that the markets will continue to distrust any price action through until Monday, given also thinned liquidity the potential for another surge in volatility is high," Foley said.
Stocks, oil and metals slumped overnight after Dubai World announced a six-month standstill on its debt. The euro sank as far as $1.4827, while the dollar fell below Y85 for the first time in 14 years, prompting Japanese authorities to threaten investors with intervention.
European banks, including Credit Suisse, UBS AG, Barclays, ING Groep INV and Deutsche Bank, indicated their exposure to Dubai World's debt wouldn't have a significant impact on them. Governments from India, Philippines, Brazil and Taiwan also rushed to say that their financial systems' exposure to the conglomerate is limited.
That prompted the euro to climb back from its overnight low to trade around $1.49. The dollar also bounced back from its low against the yen, as did European stock and commodity markets.
"There is quite a bit of nervousness in the market, so I wouldn't expect the dollar to be sold aggressively, and the euro around $1.49 may be far enough for now," Foley said.
U.S. stocks are set to open lower, with futures for the Standard & Poor's 500 index down 0.2%, after slumping earlier as much as 1.7%.
Dubai World, an investment company in property and financial services, accounts for about $60 billion of the city-state's $80 billion in liabilities, of which half is estimated by Credit Suisse analysts to be held by European banks.
U.S. banks have only $9.9 billion United Arab Emirates loan exposure compared $49.5 billion for U.K. banks, Royal Bank of Scotland estimates. That could assuage some of Friday's jitters in U.S. markets. But the lack of official data leaves investors wondering.