By Naomi Tajitsu
TOKYO, Jan 22 (Reuters) - The yen hit a 2-1/2-year high
against the dollar on Tuesday as Asian stocks tumbled on fears of
a U.S. recession, which prompted investors to dump risky assets
and higher-yielding currencies.
The Japanese currency jumped to a five-month high against the
euro and a 21-month peak versus sterling in volatile trade on
growing concerns that a U.S. slowdown may be too sharp for other
major economies and emerging markets to escape unscathed.
"Things are pretty hairy today," said Mitsuru Sahara, senior
vice president of forex at Mitsubishi UFJ Bank.
"The market is trying to figure out when the sell-off in
stocks is going to climax," he said, adding that the yen was the
beneficiary of panic selling in equities, which drove the Nikkei
stocks average <> down more than 5 percent to a 2-1/2-year
low.
The dollar plunged as far as 105.61 yen <JPY=> on electronic
trading platform EBS, its lowest since May 2005, as expectations
buzzed that the Federal Reserve may cut rates by a half-point
both this week and next in an attempt to steer the U.S. economy
away from a recession.
The U.S. currency trimmed some losses to trade around 106.10
yen in late Tokyo trade, little changed on the day. The dollar
has dropped nearly 5 percent against the yen so far this month,
setting the stage for the pair's biggest monthly loss since 2001.
The euro fell to a five-month low of 152.32 yen <EURJPY=R> on
EBS, while sterling fell as low as around 204.90 yen <GBPJPY=R>,
the lowest since April 2006. Both pairs trimmed some losses later
in the day.
The euro fell to a one-month low of $1.4390 <EUR=>, in part
dragged lower by weakness in yen crosses, while sterling hit a
10-month low of $1.9372 <GBP=D4>.
Market players also said that despite dollar losses against
the yen, the U.S. currency was supported against the euro and
other high-yielding currencies on the view that other countries
may be vulnerable to a U.S. recession.
"Until recently, there had been expectations for a decoupling
from a slowdown in the U.S. economy," said Tohru Sasaki, chief
foreign exchange strategist for JPMorgan Chase Bank in Tokyo.
"But if the U.S. falls into a recession, that would be a
significant slowdown, meaning emerging markets and countries such
as Australia are likely to be affected as well," Sasaki said.
The euro has slid as investors believe the European Central
Bank will start cutting rates later in the year, following the
Fed. At the same time, the sharp stock sell-offs prompted market
players to price in more Fed rate cuts.
"It's a combination of carry unwind and repatriation, as well
as little or no chance of rate hikes being priced into the
high-yielders," said Gerrard Katz, head of North Asia FX trading
at Standard Chartered.
CARRY UNWINDS, FUND REPATRIATION
The Bank of Japan's policy board kept interest rates
unchanged at 0.50 percent on Tuesday by a unanimous vote in a
widely expected decision.
Investors now await post-meeting comments from BOJ Governor
Toshihiko Fukui to see how he addresses growing speculation that
the central bank's next move may be to lower interest rates
rather than to raise them.
The Australian dollar fell to a five-month low around 90.50
yen <AUDJPY=R> while the New Zealand <NZDJPY=R> dollar slipped to
a four-month low around 78.10 yen, with both currencies later
trimming some losses.
The Japanese currency's rise was due to a mixture of the
unwinding of long-standing short yen positions, and buying by
speculators betting that the yen had more room to rise, market
players said.
"There had been a build-up in yen carry trades over the last
two or three years and such positions still exist. When
volatility rises and uncertainty increases like this, the yen
tends to be bought back," said JPMorgan Chase's Sasaki.
This includes overseas investors who had sold the
low-yielding yen to invest in emerging markets, Sasaki said.
Short-term speculators have also flocked to the yen, betting
that the falls in equities markets would lead to risk reduction
and boost the yen.
(Additional reporting by Masayuki Kitano)
