London: The dollar ceded gains as US stock futures moved into positive territory, but persistent wariness over the global economic outlook was expected to support the US currency and the low-yielding yen.

Recession fears became a reality in Germany, where gross domestic product contracted by 0.5 per cent in the third quarter, tipping Europe's biggest economy into recession for the first time in five years.

Shortly after the data's release, the Organisation for Economic Cooperation (OECD) cut its economic forecasts for the United States, Japan and euro zone, and said the 30-nation OECD area appeared to have entered into recession.

The projections were released before an emergency meeting of leaders from the Group of 20 developed and developing countries in Washington this weekend. "I would think there is still an upside for both the dollar and the yen after some consolidation ... given the likelihood of further bad news to come," said SG currency strategist Phyllis Papadavid.

The euro rose 0.8 per cent against the dollar to $1.2583, clawing back from the two-week low of $1.2389 it had set earlier in the global session.

The single currency's gains were partly driven by its rise to a record high against sterling. Sterling was down 0.5 per cent at $1.4846, having earlier fallen to a six-and-a-half year low at $1.4807.

Financial bailout

Risk aversion was heightened after the US Treasury backed away on Wednesday from using its $700 billion (Dh2,569 billion) fin-ancial bailout to buy bad mortgages, raising fears that banks would have trouble shoring up their financial health.

"Investor sentiment has been hit by fears banks will not be able to weather the financial storm without being able to offload their troubled assets from their books," RBC Capital analysts said in a research note. "Policy U-turns in this environment do not exactly breed confidence."

The single currency also rose 2 per cent to 120.75 yen. Earlier in the global session it briefly fell as low as 117.65 yen, the lowest since October 28.

The dollar recovered from the day's low of 94.53 yen to 96.00 yen, up 1 per cent on the day. Asia-based traders said short-term speculators who bought the yen from around 97 yen sold the Japanese currency back to book profits.

Wariness of risk also battered the Australian dollar, which fell to a two-week low of $0.6348 in late New York trade the previous day, forcing the Australian central bank to intervene to support the currency early yesterday.

The pound's slide against the dollar on Wednesday pushed one-month volatility as high as 28.9 per cent from around 27 per cent late on Wednesday. That took it back towards record peaks of around 29.5 per cent hit late last month, analysts said.

Three-month volatility also jumped to a record 23.25 per cent.

The pound was battered after the Bank of England said on Wednesday the British economy would shrink sharply next year, bolstering expectations that further sharp cuts in interest rates were in the pipeline.

That added to expectations the European Central Bank would also cut rates further.

Later in the day, markets will look for hints on whether the European Central Bank might step up its monetary policy easing as several ECB policymakers including President Jean-Claude Trichet are expected to speak at a banking conference in Frankfurt.