The dollar fell broadly and the yen and Swiss franc rallied on Monday as concerns about US housing market woes spilling into the wider economy dented risk appetite and led investors to buy low yielding currencies.
Concerns about the US subprime mortgage market - amplified in recent week by trouble at two Bear Stearns-managed hedge funds - have dented investors' appetite for risk. "The market is concerned about the state of the US financial sector following the collapse in the Bear Stearns funds," said Chris Turner, head of FX strategy at ING. "This has led yields to come off and investors to deleverage large open positions and sell dollars."
At 1125 GMT the dollar was down 0.4 percent versus the yen at 122.68 yen. It was down a 0.3 percent against the euro at $1.3581. The dollar was down 0.6 percent versus the Swiss franc at 1.2145 francs. The dollar was also off 0.8 percent versus the high yielding New Zealand and Australian dollars.
The yen was broadly stronger, up 0.1 percent versus the euro at 166.59 yen, recovering from last week's record low. Japanese investors are expected to repatriate some cash from the eurozone, where a bumper 44 billion euros worth of bond redemptions and coupon payments are due this week.
Overstretched positioning - with speculative yen shorts hitting record highs according to the latest weekly data from the Commodity Futures Trading Commission - also helped the yen. The Bank of Japan's quarterly tankan poll came in line with forecasts, supporting the view that the BoJ will raise interest rates very gradually from the current 0.5 percent.
"No real surprises in the Tankan, with most of the main numbers coming in very close to market expectations," said Mellon in a note to clients. "As a consequence, the JPY had a quiet overnight session... the overall weak JPY tone is likely to remain intact." Currently the yen remains an attractive currency to borrow to fund higher-yielding investments. Such carry-trades have helped send the yen to 4-1/2 year lows versus the dollar and record troughs against the euro last month.
European exporters have complained that the euro is hurting them. PSA Peugeot Citreon chief executive Christian Streiff said at a conference on Saturday that the unit is 30 percent overvalued versus the yen and that Europe needs a currency that serves growth.
Investors were also reluctant to sell the yen further given that it is a short week, with US markets closed on Wednesday for Independence Day. Sterling hit a 2-1/2-month high versus the dollar at $2.0128, inching towards a 26-year high ahead of a widely expected Bank of England rate hike to 5.75 percent on Thursday.
Traders said an incident in which a burning vehicle was driven into the main terminal at Glasgow's airport at the weekend, which followed a thwarted bomb plot involving two cars in central London late last week, was having no real impact in the market so far on Monday. Demand for the dollar has been waning since Thursday, when the Federal Reserve left interest rates on hold and said core inflation had eased a bit, boosting the view that US overnight rates will remain at 5.25 percent for some time.