Yen surges, sterling falls as UK nerves grow

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The safe-haven rose sharply against the euro and dollar while sterling fell to its lowest in more than 30 years on Tuesday, as currency markets fretted about more signs of economic stress stemming from Britain's decision to leave the European Union.

The yen climbed to a two-week peak versus the dollar as investors went into full risk-aversion mode. So far this year, the Japanese currency has soared more than 18 percent against the greenback.

After a disappointing reading of construction industry sentiment on Monday, the PMI survey of purchasing managers in Britain's dominant service sector released on Tuesday showed only a minimal fall-off in activity last month.

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While the data covered the pre-Brexit period and was not all that bad, investors took it as a negative sign nonetheless and were worried future economic reports would show further evidence of a weakening U.K. economy. That could prompt further monetary easing from the Bank of England.

BoE Governor Mark Carney only marginally cooled expectations of further aggressive easing to combat the shock to the economy in the months ahead.

"The consequences of Brexit have put a summer U.K. interest rate cut squarely on the table, exacerbating negative sentiment towards U.K.-based assets," said Joe Manimbo, senior market analyst, at Western Union Business Solutions in Washington.

Factors driving the pound lower

One important gauge of markets' appetite for risk and expectations for growth in the longer-run, U.S. 10-year Treasury yields, fell to the lowest on record and Carney warned that global aversion to risk might persist for some time. In the currency world, that all tends to drive money into the traditional security of safe-haven assets such as the yen.

The dollar fell 0.83 percent against the yen to 101.69 yen, after earlier declining to a two-week low of 101.46.

The dollar dropped further after data showed new orders for U.S. factory goods fell 1.0 percent in May on weak demand for transportation and defense capital goods. New orders had previously risen two straight months.

The euro dropped 1.63 percent against the yen to 112.52 yen.

Sterling, meanwhile, has been the main underperformer on Tuesday, briefly tumbling to a 31-year low against the dollar at $1.2999. It was last at $1.3032, down 1.94 percent.

The British pound also sank to a two-and-a-half-year low against the euro, pushing the single European currency to 84.86 pence, up 1.17 percent on the day.

"The market looks for a reduction to zero in interest rates by the end of the year, with some calling for the resumption in quantitative easing as well," said Brad Bechtel, managing director at Jefferies in New York.