Renewed Global Worries Lend Support to Yen

Does the Yen’s Pullback Take the Heat Off Bank of Japan?
Akio Kon | Bloomberg | Getty Images

The yen rose from recent multi-year lows against the dollar and euro on Monday as renewed worries about the global economy spurred traders to sell riskier investments funded by the cheap Japanese currency.

Commodities-linked currencies such as the Australian and New Zealand dollars declined more than 1 percent against the U.S. currency, as gold prices plunged below $1,400 an ounce, dragging commodity prices lower across the board.

(Read More: Gold Hit by Panic Selling, Margin Calls Driving Downdraft in Other Metals, Oil)

China's economic recovery unexpectedly stumbled in the first three months of 2013, data showed on Monday. Disappointing news on manufacturing growth in New York state and on U.S. homebuilder sentiment added to concern the global economy may be losing momentum.

(Read More: NY Fed Manufacturing Growth Slows Sharply in April)

"If there's any shift in sentiment in the market place, it's risk aversion, and the yen and dollar benefit in more of a risk-averse climate," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York.

The dollar traded 1.9 percent lower at 96.55 yen in late New York trade, having earlier dropped as low as 97.07 yen, according to Reuters data. It has retreated from a four-year high of 99.94 yen on Thursday, and hefty resistance is expected at 100 yen.

The euro fell 2.5 percent to 125.78 yen, its lowest level in a week and down for a second straight session. Last week, the euro touched 131.11 yen, its strongest since January 2010.

The yen has been a favorite funding currency in carry trades, in which investors borrow cheaply in yen and reinvest the money in currencies and assets with higher returns. When stress in financial markets rises, investors tend to unwind those trades and buy back the Japanese currency.

Investors also refrained from selling the yen ahead of a Group of 20 meeting in Washington. Fears members may discuss yen weakness grew after the United States said it would watch Japan's policies to ensure Tokyo was not devaluing the yen to gain competitive advantage for its exports.

(Read More: US Warns Japan Not to Hold Down the Yen)

The G-20 meeting begins on Thursday and investors were wary other countries may complain about, or seek to stem, the yen's rapid decline that accelerated after the BOJ unveiled radical easing steps on April 4.


"The statement on Friday from the U.S. Treasury comes back to the theme of currency wars," said Jane Foley, senior currency strategist at Rabobank. "There's the risk of political resistance to a significant fall in the yen."

The dollar briefly extended its declines against the yen after data showed the pace of growth in manufacturing in New York state slowed more than expected in April while overseas investors were large sellers of long-dated U.S. securities in February.

The Australian dollar's losses extended to a one-month low of $1.0291 as gold tumbled and worries about China's economy, Australia's biggest export market. It was last at $1.0294, down 2.01 percent on the day, the worst percentage loss in a single session since Nov. 9, 2011.

The New Zealand dollar lost 2.39 percent to $0.8383, a one-week low.

Chris Turner, head of currency strategist at ING, said the drop in gold prices was likely to lead to more market volatility and further unwinding of long positions in riskier assets and currencies, which will benefit more liquid currencies like the yen and the dollar.

The euro was down 0.63 percent to $1.3028, off Thursday's one-month high of $1.3138. The euro zone common currency has seen resilient demand despite signs of renewed tension in the 17-member area following a bailout for Cyprus and on political uncertainty in Italy.

Rabobank's Foley said the euro was benefiting from a run of lackluster U.S. data that was limiting demand for the dollar.

"There are a lot of things to worry about in Europe, but there's a lot of good news already priced into the dollar, and the data has been disappointing," she said.