The dollar fell across the board on Friday as defiant comments out of Afghanistan added to bearish dollar sentiment in the wake of Tuesday's massive terrorist attacks on the United States. 

Markets were already becoming jittery in thin and volatile morning trade at the prospect of U.S. stock markets opening next week. 

But reports that Afghanistan's Taliban regime has threatened to retaliate against any U.S. attacks on their country concentrated minds on the fact that the U.S., and the western world generally, was entering a period of great uncertainty. 

``The Taliban comment has impacted the dollar,'' said a European bank analyst. ``If the possible revenge actually happens, it will have a big negative impact on the global economy.'' 

The dollar was down by almost one percent against the euro, the yen and the Swiss Franc in the wake of the Taliban reports. The dollar was trading at $0.9190 against the euro, its lowest for two weeks, 117.70 to the yen, around a six month low, and 1.6325 to the Swiss franc -- around a seven month low. 

VOLATILITY RETURNS AFTER PERIOD OF RELATIVE CALM 

After falling by as much as three percent against major currencies following terrorist attacks on the United States on Tuesday, the dollar entered a period of relative calm as officials urged banks to keep trading to a minimum. 

Although volumes remained thin, analysts said the prospect of U.S. equity markets re-opening early next week had refocused attention on the possible consequences for the economy. 

``What we still don't know is how stocks will respond,'' said Teis Knuthsen, Chief Strategist at SEB Merchant Banking, adding that any substantial falls in the U.S. equity markets were bound to hit the dollar. 

More broadly, he said: ``As long as the U.S. is the center of this crisis then a specific risk premium will be attached to the dollar.'' 

POLICY COORDINATION 

Central banks have injected more than $190 billion into global markets in the past two days and the U.S. Federal Reserve and the European Central Bank have set up a swap arrangement aimed at aiding the cash needs of European banks affected by the U.S. disaster. 

Expectations that major central banks could step in to stem any sharp fall in the dollar -- possibly through coordinated intervention -- were providing something of a safety net for now, analysts said. 

Japanese Finance Minister Masajuro Shiokawa said on Friday he had agreed with U.S. Treasury Secretary Paul O'Neill to take appropriate steps on currencies if moves became too volatile. 

Japan has made no secret of its desire to see a weaker yen to help boost the economy at a time when it appears to be slipping into its fourth recession in a decade. 

U.S. Treasury Secretary Paul O'Neill said late Thursday there was ``every reason'' to maintain confidence in the U.S. economy and said prospects for a U.S. rebound were unchanged. 

There was also speculation that major central banks could coordinate monetary easing to win back confidence in the global economy, much as they did in the wake of the 1987 Wall Street crash. 

Fed funds futures are already pricing in the likelihood of further aggressive easing by the year-end. 

U.S. DATA EYED BUT STOCKS IMPORTANT 

As markets struggled to assess the longer-term impact on the U.S. economy, dollar bears pointed to the fact that U.S. economic prospects had not looked good even before Tuesday's attacks. 

A University of Michigan survey of consumer sentiment -- conducted before the disaster -- fell to 83.6 in September, its lowest for nearly eight years. 

U.S. data releases on Friday include retail sales, industrial production and capacity utilization, and producer prices. 

``The figures will definitely be looked at but the Michigan survey had no real impact so it seems that there are other issues to think about. The most important will be the stock markets next week,'' said one London based currency trader. 

A few banks have reported minor problems with dollar settlements, but most traders said glitches were small considering the massive damage in New York.