The yen gained broadly for a third straight session Wednesday, as volatile global stock markets and concerns about a fallout from the U.S. subprime mortgage sector prompted investors to close out carry trades.
The yen has rebounded from recent multiyear lows with the unwinding of carry trades sparked by worries subprime loan problems could spill into the broader economy. In carry trades, investors borrow in a low-yielding currency such as the yen to buy securities in a high-yielding currency.
Subprime loans are extended to borrowers with poor credit.
"Smart money is starting to take chips off the table and they're taking profits in carry trades," said Manfred Wolf, director of corporate FX sales at HVB Bank in New York.
"There's also some fear involved in these trades because we are coming to a quarter-end and institutional investors have to show a profit," he added.
In late afternoon trade, the dollar was down 0.5 percent at 122.63 yen, its worst one-day decline in more than two months. Earlier, the greenback fell to a two-week low around 122.23 yen.
The euro was down 0.5% at 164.93 yen, according to electronic trading platform EBS, more than 2 yen below last week's record highs. It was the biggest single-session dip for the euro against the yen in about two weeks at current levels.
Market nervousness about growth further pushed the dollar to session lows after a U.S. report showed new orders for durable goods tumbled more than expected in May, the first decline since January.
Analysts said the yen still benefited from comments by Japanese Finance Minister Koji Omi this week, who cautioned that markets should be aware of the risk of one-way bets against the yen. Officials from New Zealand and South Korea have also voiced concerns over yen weakness.
"In my view, the currency pair that's most in danger here is the Aussie dollar/yen cross. If commodities come off, then it's a double whammy for that pair," Wolf said.
The Australian dollar was down 1.7% against the yen at 102.36, hurt by a decline in commodities. Gold fell to its lowest in three months on Wednesday, while silver hit a five-month low. Precious metals are being liquidated during this current wave of risk aversion.
Against the dollar, the euro was down 0.1% at $1.3440. Traders said it drew some support from buying by Japanese retail investors, such as those trading with margin accounts.
Other high-yielding currencies also fell broadly, with the New Zealand dollar dropping more than 1% to US$0.7571, while the Australian dollar dropped 1.1% to US$0.8357 The New Zealand dollar fell 1.1% against the yen to 92.65 yen.
The Federal Reserve started a two-day monetary policy meeting on Wednesday. The Fed, the U.S. central bank, is widely expected to keep benchmark interest rates steady at 5.25%.
"The key area is their commentary on inflation. Fed still stuck (between) the rock (of inflation) and hard place (enough growth) to keep them on hold until after the end of the year," said Andrew Busch, global FX strategist at BMO Capital Markets in Chicago.