Mounting fears of global recession sent Asian bourses down after the Nasdaq plunged more than 5 percent and European stocks dropped sharply, dragged lower by banks, while safe-haven gold posted record highs above $1.840 per ounce.
The fall in the Aussie, however, was limited as it held above its 200-day moving average, with traders citing support from fund and exporter selling of the dollar against Asian currencies.
"I'm really surprised by how quiet the market is today, compared to stocks. Investors are awaiting more developments in Europe and the U.S. as we enjoy some lukewarm pre-weekend trading in Asia," said a trader for a major Japanese bank who did not want to be identified by name.
The euro fell 0.2 percent to $1.4310, after slipping 0.8 percent to $1.4303 as an unnamed euro zone bank borrowed $500 million in one-week from the European Central Bank.
That sent interbank lending rates soaring with the USD Libor/OIS spread blowing out to 19 basis points, the highest level in 12 months. Three-month Libor also struck four-month highs at 2.9778 percent.
"In this situation where we are becoming more concerned about funding, it is natural that the U.S. dollar does well," said Robert Rennie, chief currency strategist at Westpac.
"We are still within a very well rehearsed range of $1.41-$1.45," he added.
The dollar was also up 0.1 percent against the New Zealand dollar, which was at $0.8218 after at one point dropping nearly 2 percent to $0.8196. The Aussie was down 0.1 percent at $1.0359 after skidding to $1.0338 from this week's high above $1.0600.
"Investors are parking funds in dollars as global economic concerns heighten after weak U.S. data the previous day and as a lack of clarity about Europe's debt problems spreads to banks in the euro zone," said Tsutomu Soma, senior manager at Okasan Securities.
Recent data heightened concerns that the United States will head back into recession at the same time the country's rising debt load and record deficit leave the Federal Reserve with fewer options to stimulate growth.
The data sparked a frenzy of safe-haven buying with 10-year Treasury yields hitting a deep low of 1.97 percent. They were last at 2.033 percent.
Investors refrained from shifting into traditional safe havens such as the Swiss franc and the yen due to fears of intervention.
Market players were reminded about the looming intervention after the dollar briefly spiked against the yen hitting as high as 77 yen on stop-loss buying with talk of buying from a British bank.
STAYING ON GUARD
Japanese authorities also warned traders to keep their guard up after Switzerland's central bank intervened in the forward market earlier this week and as it engineers negative interest rates.
"Dollar/yen is expected to be supported, but gains will be limited at 77 yen. It should gradually test downside below a record low 76.25," Okasan's Soma said.
Soma's views echo those of other Tokyo traders who warn that as the Japanese return from their summer holidays next week, exporters will likely sell dollar/yen in end-of-the-month transactions, heightening the risk of intervention.