Dollar and stocks fall on oil

By Carolyn Cohn

LONDON (Reuters) - The dollar looked set on Friday for its biggest weekly decline since 1985 and world stocks fell as weak oil prices and concerns about the U.S. economy worried investors in the last full trading week of 2008.

Japanese government bond yields fell to 3-1/2 year lows after the Bank of Japan cut its key policy rate by 20 basis points to 0.10 percent, the lowest rate since 2006.

Japan joined the global trend for lower interest rates after the United States took rates close to zero earlier this week, with the auto industry the latest focus for concern over the U.S. economy.

General Motors and Chrysler approached a deal on Thursday to secure emergency loans as part of a U.S. government aid package, sources familiar with the talks told Reuters.

"The automakers' issue is a problem for the entire U.S. economy ... and the fall in oil prices is part of a global economic story because of demand issues, and that's dragging on the dollar," said James Hughes, markets analyst at CMC Markets.

"The automakers and oil prices, they're not just dominating the currency markets, they're also dominating the equity markets as well."

The increasingly low-yielding dollar has fallen 4.6 percent on a trade-weighted basis this week, heading for its biggest weekly fall since September 1985, as traders start to close positions for the year ahead of the Christmas break.

The dollar rose 20 percent between July and November, boosted by worries about recession in the euro zone and by a flight to quality during the global financial crisis.