Yen extends rally on China, Middle East worries

The yen rose on Tuesday as traders sought safety in the low-risk currency on anxiety about sluggish global growth, further losses in the Chinese stock market and the breakdown in relations between Iran and Saudi Arabia.

The Japanese currency, traditionally sought at times of risk aversion, climbed to its strongest level since April against the euro and hovered at its highest since October versus the dollar. It also rose to the loftiest against the sterling since October 2014.

"It's a risk-aversion trade. It's a persistent play in the yen," said Mazen Issa, senior currency strategist at TD Securities in New York.

The yen briefly retreated from Monday's highs after China injected an estimated $20 billion into money markets in a stability effort after Monday's alarming 7-percent drop in stocks.

Earlier, Shanghai shares eked out a 0.2 percent gain after Chinese regulators said they may restrict stock sales by major shareholders.

"China risk adds a layer of support to the yen, which already looks to appreciate this year as Japan's current account surplus grows at a faster-than-expected pace," said Junichi Ishikawa, market analyst at IG Securities in Tokyo.

But as European stocks fell, the yen hit its strongest in over eight months at 127.47 yen, Reuters data showed. It pared some gains against the single currency, last up 1.2 percent at 127.80 yen per euro, as top European shares prices ended higher on the day.

Against the dollar, the yen rose toward an 11-week high of 118.705 hit on Monday, up 0.4 percent on the day at 119.01 yen , according to EBS data.

Also stoking investor jitters was news that Saudi Arabia broke off ties with Iran after the Saudi embassy in Tehran was stormed by protesters, escalating tension between two regional rivals.

The euro fell 0.8 percent at $1.0739 after touching a one-month low of $1.0709 earlier Tuesday. Data showed euro zone core inflation slowed for the second consecutive month in December, reinforcing expectations the European Central Bank will have to add further monetary stimulus to avert deflation.

Its fall ended the recent trend of the euro performing well in times of volatility, as investors who had held euro-funded carry positions — in which a low-yielding currency is borrowed and then sold in favor of a riskier, higher-yielding one — have bought back euros.

The dollar hit a one-month high against a basket of major peers, last up 0.5 percent at 99.393.