Safe-Haven Yen Tumbles as Gold Fears Start to Stabilize

Are the Days of a Strong Japanese Yen Numbered?
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The yen tumbled against the dollar and euro Tuesday, reversing the previous session's sharp gains as investor anxiety triggered by a record plunge in gold prices eased, denting demand for the safe-haven Japanese currency.

Finance ministers and central bankers from the world's leading economies will discuss the economic and financial market outlook, including the Cyprus crisis and asset price reactions, at the talks among the Group of 20 advanced and emerging economies beginning on Thursday in Washington.

The euro rallied to a seven-week high against the dollar, partly helped by its 2 percent jump against the yen. Investors shrugged off data showing a sharp fall in German investor sentiment in April.

Gold rose on Tuesday after a record-breaking one-day drop in the previous session sparked a broad selloff in commodities and equities alike. The explosions in Boston added to a nervous tone in financial markets.

Two bombs ripped through the crowd at the finish line of the Boston Marathon on Monday afternoon, killing three people, maiming others and injuring more than 100 in what a White House official said would be treated as an "act of terror."

"Yesterday there was a lot of fear in the market, especially as people were watching what's going on in gold," said Douglas Borthwick, managing director at Chapdelaine Foreign Exchange in New York. "There's a thought that maybe things were overdone in the yen cross."

But as gold and stock prices stabilized and investors concluded that the Boston Marathon bombing may have been an isolated incident, they resumed buying higher-risk assets.

Comments from a senior Canadian financial official that Canada was supportive of Japan's effort to kick-start the economy and that the G-20 believed policy should target domestic economies and not exchange rates also encouraged investors to buy back the euro against the yen from oversold levels, analysts said.

The dollar rose to a session peak at 98.15 yen, according to Reuters data, before pulling back to 97.50 yen, still up 0.8 percent on the day.


The dollar slid 1.7 percent against the yen on Monday, the biggest one-day move since late February, after weaker-than-expected China and U.S. data, a selloff in gold and the explosions in Boston prompted investors to exit riskier investments funded by cheap borrowing in the yen.

(Read More: Has China's Economy Hit a 'Dead End'?)

"Really a retracement across the board of a lot of the moves that we saw yesterday," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange. "Fundamentals right now appear to be taking a back seat to a lot of position and order-driven flows."

The dollar extended gains versus the yen after data showed U.S. consumer prices fell in March for the first time in four months, while the housing market recovery appeared to be losing momentum.

A sharp rally in the dollar against the yen has stalled in recent sessions as investors booked profits ahead of significant resistance and option barriers at the psychological 100-yen-per-dollar level. But analysts said the weakening yen trend remained intact after the Bank of Japan's aggressive monetary easing earlier this month.

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

"The fundamental picture still remains supportive of a weaker yen going forward as the recent rebound over the last couple of days is unlikely to prove sustainable," said Lee Hardman, currency economist at BTMU, which forecasts the dollar at 109 yen in 12 months.

Investors will also closely monitor gold prices and another plunge could renew demand for the most liquid currencies such as the dollar and yen.

The euro rallied 2 percent to 128.65 yen, having hit a session peak of 128.99 yen, according to Reuters data.

Against the dollar, the euro rose 1.2 percent to $1.3196, with central bank buying reported. It hit a session peak of $1.3189, the strongest since Feb. 25, after breaking resistance around $1.3140. Further resistance is seen in the $1.3270/1.3300 area.

Traders said investors would need to see a clearer sign that commodity prices are stabilizing before their appetite for riskier assets returns.

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Robert Rennie, head of currency strategy at Westpac said in a note that Japanese investors in gold may have been big sellers after the precious metal hit a record high in yen-denominated terms last week.

The Australian dollar rose 0.8 percent to $1.0389, while the New Zealand dollar gained 1.2 percent to $0.8505. Both saw steep losses in the previous session.