The yen strengthened against the dollar for the third consecutive session as investors watching falling global stock prices continued to shun risky trades funded by cheap borrowing in the Japanese currency.
However, only modest losses on Wall Street despite sharp declines in Asian and European equities made some think the latest liquidation of carry trades, in which investors borrow in a low-yielding currency to buy other higher-yielding assets, may be tapering off.
"While we saw a lot of continuing unwinding of carry trades in Asia and also in Europe, we are going the other way a little now," said Bernard Tsui, senior vice president and co-FX manager with Union Bank of California.
"With all the central banks meeting this week, people may be on the sidelines," Tsui added.
In afternoon trading in New York, the dollar was down 0.8% versus the yen, after dropping to a three-month low of 115.16 yen earlier in the session.
The euro had fallen as low as 150.89 yen, according to electronic trading platform EBS -- its lowest level since late November.
The European common currency last week suffered its biggest weekly percentage loss against the yen since August 2003, after hitting a record high near 160 in February.
Sterling sank nearly 2% against the Japanese currency after earlier hitting a five-month low of 221.20 yen. The pound had been one of the biggest beneficiaries of the carry trade financed by the yen or Swiss franc.
Investors have viewed the gains in yen as indicative of an unwinding of carry trades and therefore of changing sentiment on risk taking.
That may be why investors are willing to slow their relentless yen buying ahead of central bank meetings this week in Australia, Britain, Canada, the euro zone and New Zealand.
Meanwhile, the euro was down 0.8% against they dollar, likely weighed by the euro's losses against the yen. Against the Swiss franc, the dollar is up modestly.
Not A Dollar Story
Throughout the meltdown in global equity markets and the vicious yen rally, the dollar has by and large remained within a broad trading range against most major currencies.
In fact, the dollar index -- a measure of the greenback's performance against six other major currencies -- is up 0.7% from last Tuesday's two-month low.
Market participants said the price action has been concentrated in the yen because of the buildup of short positions. In addition the subsequent flight to safety into U.S. Treasury debt may be supportive for the dollar broadly.
"If risk-reduction continues, the dollar index will increasingly gain broad strength," said Stephen Jen, global head of currency research with Morgan Stanley in London.
For now, currency investors have been keenly tracking moves in global equity prices.
Tokyo stocks posted their biggest one-day fall in nine months on Monday while Chinese stocks, which helped to trigger a global sell-off last week, dropped as much as 4%.
"Right now, the focus remains on the yen carry trade unwinding and its impact on the stock markets," said Joe Francomano, vice president of foreign exchange at Erste Bank, New York.