Yen stands tall as growth concerns curb risk appetite

LONDON: The Japanese yen rose sharply across the board on Wednesday as investors grew cautious on the first trading day of 2019 about spluttering global growth and volatile equity markets.

In a bleak start to the year, the mood was wary in currency markets with perceived riskier currencies such as the Australian dollar and the euro down across the board while the yen climbed to a seven-month high versus the dollar.

The yen often benefits during geopolitical or financial stress as Japan is the world's biggest creditor nation and sees inflows during periods of heightened global market volatility.

Japan's currency has strengthened for three straight weeks and was among the few gainers in 2018 against a resurgent dollar. In the last four days alone, it has gained 2.2 percent.

"If you embrace the idea of the U.S. slowdown gathering momentum and the Federal Reserve cutting rates, then the yen is the currency for you," said Kit Juckes, chief FX Strategist at Societe Generale.

As expectations for more U.S. rate increases have gradually been whittled away in markets in recent weeks, financial markets now expect no rate hikes this year and traders are focusing on the dollar's vulnerabilities.

"It (the yen) is cheap on most metrics, is not currently undermined by a weakening Chinese yuan and isn't dependent on economic or policy surprises in Japan," Juckes added.

He said the correlation between the yen and U.S. interest rates had returned after being largely non-existent in early 2018.

Volatile stock markets have also boosted the safe-haven appeal of the yen. The CBOE Volatility Index, a widely followed barometer of expected near-term volatility for U.S. stocks, has nearly doubled to 28 from 16 at the start of December.

The yen could extend its gains if hedge funds decide to unwind large short positions on the currency which, according to positioning data, is close to 5-year highs.

The dollar fell 0.8 percent against the yen to 108.71, its lowest since June 1.. The dollar index was little changed at 96.224.

Weak manufacturing data from Spain, France, Italy, and Germany weighed on the euro, which weakened 0.2 percent against the dollar to $1.1438.

Traders expect the single currency to remain under pressure as both growth and inflation in the eurozone remain below the European Central Bank's expectations.

The euro lost 4.4 percent of its value against the dollar in 2018.

Fears of a global slowdown were aggravated on Wednesday by a survey showing China's factory activity contracted for the first time in 19 months in December as domestic and export orders continued to weaken.

While the dollar has been relatively stable going into the end of 2018, a flagging equity boom, waning cash repatriation by U.S. companies, and the possibility that the U.S. Federal Reserve will not raise interest rates as many times as it previously signalled now pose challenges for the greenback.