The yen regained its footing on Friday, as traders swooped back into the Japanese currency after its worst four-day run in more than two years. The yen had lost 2% against the dollar in the previous two days alone as worries about the impact of the coronavirus outbreak on Asia's major economies spread.
An early burst in London pushed it up as much as 0.5% to 111.48 yen, though it had edged back slightly to 111.90 by the time the first New York trades trickled in. "Traditionally, the support for the yen comes from two sources, general risk-off sentiment and a move to safe-haven bonds," said Saxo Bank's head of FX strategy John Hardy. The week's dramatic slide, though, has raised more fundamental questions about the yen's reputation as a safe harbour when FX markets get stormy.
"The question is whether recent dollar/yen spike higher could be a one-off move triggered by order flows and algorithm trading or whether it is something else. This is a very interesting test of whether we are seeing regime change." Manufacturing activity in Japan suffered its steepest contraction in seven years this month, highlighting the widening global fallout from the virus outbreak in China.
On the other side of this week's moves has been a huge charge from the dollar, which has had its strongest start to a year since 2015. It was down 0.2% against the major currencies by 1230 GMT but only after the closely-tracked dollar index touched a three-year peak overnight. The euro has been shoved down to a near three-year low, Australia's dollar traded at an 11-year low of $0.66 overnight and China's tightly-managed yuan was sitting at a two-month low of 7.0286 per dollar.
The tourism-exposed Thai baht dropped 5.5% this week, the Hong Kong dollar slipped down its controlled band while the Korean won and Singapore dollar shed more than 4%. Mexico's peso has been ripped down 2.5% too after holding up relatively well for emerging markets traders recently. "New (coronavirus) cases in (South) Korea and in Japan, (have) obviously given some people a little bit of cold feet regarding Japan and the yen as a safe haven," said David Bloom, global head of FX at HSBC.
Europe saw a flurry of purchasing managing index (PMI) data. The euro saw a modest rise to $1.0817 after IHS Markit's Euro Zone Composite Flash PMI rose to 51.6 in February, beating all forecasters polled by Reuters. The fastest rise in British factory output for 10 months also helped sterling end an otherwise tough week on a high as it climbed 0.4% against the dollar and 0.25% against the euro to $1.2930 and 83.5 pence per euro respectively.
"The euro zone economy managed to pick up some momentum again in February despite many companies having been disrupted in various ways by the coronavirus," said Chris Williamson, chief business economist at IHS Markit.
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