Dollar hits record low vs euro, yen up on risk unwind

The dollar sank on Monday, hitting a record low versus the euro and other currencies after traders took a tumble in US stocks and the apparent indifference of Group of Seven finance officials to recent dollar weakness as a cue to dump the US currency.

Weakness in US stocks on Friday, when the Dow Jones industrial average and the Standard & Poor's 500 posted their worst daily percentage drops in two months, also pushed the dollar to a record low against a basket of currencies.

Tokyo traders on Monday picked up where dollar selling left off on Friday. At the same time, struggling equities discouraged demand for risky assets, boosting the yen as they triggered more unwinding in trades to sell the yen for high-yielding currencies.
The euro climbed to $1.4349 on electronic trading platform EBS after G7 officials ended a weekend meeting without offering verbal support for the beleaguered US currency, as expected, although they did urge China to speed up appreciation of the yuan.

The dollar fell more than 1 percent to 113.25 yen, hitting a six-week low, before pulling back to around 113.75 yen.

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The Japanese currency was bolstered by a 3.0 percent fall in the Nikkei stocks average, which along with other Asian equity markets followed US stocks lower.

"Stocks are down and volatility has shot up, so putting on yen carry trades is out of the question," said Seiichiro Muta, forex director at UBS Securities in Tokyo.

But the yen retreated from the day's highs, with some traders saying they had already factored in a sizable drop in the Nikkei, and that additional yen gains in Tokyo trade were unlikely barring a significant extension in Asian stock losses.

Market participants expect the dollar to stay weak on the growing view that the Federal Reserve may cut interest rates this month, as weak earnings among many US banks and corporations and a suffering housing market point to an economic slowdown.

Traders are bracing for US data on new and existing homes to be released later in the week, and some said that weak readings may push the dollar lower this week.

But they added that yen gains may be limited, as Japanese investors, particularly institutional players, were expected to step in to sell the yen to buy foreign assets as part of their investment plans for the second half of the financial year.

Japanese importers were also seen keen to sell the yen as it appreciates.

The yen may become vulnerable to selling in the near term, as some traders said that a Fed rate cut this month would likely boost equities, just as its decision to slash its fed funds rate by 50 basis points last month triggered a surge in US stocks, which may reheat demand for yen carry trades.

Japenese Stocks hit 4 weeks low and Nikkei was trading down 540 points

Source - Edited from Reuters