The yen rose versus the dollar and euro Wednesday, as declining global stocks and an unexpectedly weaker September U.S. existing-home sales report caused investors to flee risky assets.
Investors were unwinding carry trades, where they fund purchases of securities in high-yielding currencies by borrowing in a low-yielding currency such as the yen, analysts said, boosting the Japanese currency.
"The yen is being driven on risk aversion and interest rate compression. The stock market is down so we are having a little bit of an unwind of carry trades," said Boris Schlossberg, senior strategist at Forex Capital Markets in New York.
News that sales of previously owned homes dived to a record low annual pace of 5.04 million units in September, combined with Merrill Lynch's $7.9 billion in write-downs, was seen cementing the case for a Federal Reserve interest rate cut next week, adding to the dollar's woes.
"Today, the housing data was so horrid that the market is almost assured of another rate cut from the Federal Reserve. That is compressing the interest rate differential between the dollar and the yen," said Schlossberg.
In early afternoon trade, the dollar was down 0.7 percent at 113.98 yen.
The euro fell 0.9 percent to 162.22 yen.
Against the dollar, the euro was down 0.2 percent at $1.4236.
The dollar index was little changed at 77.583.
U.S. short-term interest rate futures show investors have fully priced in the Fed cutting rates by 25 basis points from 4.75 percent at its Oct. 30-31 policy meeting. The Fed slashed its benchmark fed funds target rate by half a percentage point last month.
That contrasts with Europe where investors expect the European Central Bank to keep interest rates flat at 4.0 percent well into 2008 as policy-makers gauge the slowing of the economy.
Merrill Lynch's write-downs reminded investors of the troubles in the credit markets and helped to push U.S. and European equity markets lower. That also sparked speculation that a similar fate awaited other big U.S. financial institutions.
"There are all kinds of rumors involving U.S. banks this morning after Merrill's poor results. That's dragging stocks down, which in turn, puts pressure on dollar/yen," said Mark Meadows, a currency strategist at Tempus Consulting in Washington.
The Australian dollar rose after data showed underlying domestic inflation rose faster than expected last quarter, increasing the chance that the country's central bank would raise interest rates as early as November.
Though the generally heightened state of risk aversion capped gains, the Aussie was flat against the dollar at $0.8990.
The New Zealand dollar last traded 0.9 percent down against the greenback at $0.7509, ahead of a central bank policy meeting, widely expected to leave interest rates unchanged.
The Canadian dollar was up 0.6 percent at C$0.9712.