Yen rises as investors grow risk-averse

The yen gained broadly for a third straight session on Wednesday, as volatile global stock markets and concerns about fallout from the US subprime mortgage sector prompted investors to unwind carry trades.
The yen has rebounded from recent multiyear lows with the unwinding of carry trades sparked by worries that 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 currency with high interest rates.
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 foreign exchange 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 percent 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.
The yen came off modestly midafternoon after Japanese news wires reported several large Japanese mutual funds will close to new investors. Some market participants interpreted this to mean less capital outflows from Japan, suggesting a stronger yen.
Analysts said the yen still benefited from comments this week by Japanese Finance Minister Koji Omi, 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 percent 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 the current wave of risk aversion.
Against the dollar, the euro was down 0.1 percent 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 0.8 percent to US $0.7589, while the Australian dollar dropped nearly 1 percent to US $0.8374. The New Zealand dollar fell 1.1 percent against the yen to 92.65 yen.
Also on Wednesday, the Federal Reserve began a two-day monetary policy meeting. The Fed is widely expected to keep the benchmark interest rate steady at 5.25 percent.