Tokyo: The dollar rose against the euro and a basket of currencies on Friday, holding near two-year highs as worries about global economies and emerging markets prompted investors to keep reducing risk assets and repatriate funds.
Emerging market currencies have been hit hard by the global credit crisis in recent weeks, intensifying risk aversion and prompting investors to repatriate their overseas investments.
Deepening financial turmoil has boosted the allure of the dollar, the world’s most liquid currency.
The dollar’s broad strength has added fuel to sharp falls in other yen crosses as investors unwind high-yielding currencies favoured for carry trades, using the low-yielding yen to buy high-yielding currencies, traders said.
The yen also gained as a wide range of Japanese investors cut losses on their overseas investments and repatriated funds.
“Players are now focused on emerging markets as the credit crisis takes its toll on them,” said Mitsuru Sahara, a senior manager of foreign exchange sales for Bank of Tokyo-Mitsubishi UFJ.
“Nobody is willing to take risks under the current circumstances, and risk aversion will only accelerate,” he said.
The yen may gain the most as yen crosses were prone to more heavy selling due to emerging market instability and as Japanese investors - insurers, mutual funds and portfolio managers - were expected to keep trimming overseas investments they had made as part of risk diversification, he said.
The euro fell 1.1% to $1.2790 slipping from an earlier high of $1.3007 and moving closer to a two-year low of $1.2726 hit on Thursday.
The dollar index, which measures the dollar’s value against a basket of six currencies, was up 1 percent at 85.602, after rising to a two-year high of 86.120 on Thursday.
The euro fell to a six-year low of 122.75 yen on trading platform EBS.
“The key words are repatriation, risk aversion and emerging markets,” said a senior dealer at a Japanese trading house.
Asian equities slid across the region, dragging down Asian currencies such as the Korean won, with Tokyo’s Nikkei share average extending losses to fall as much 5.3 % to its lowest point in more than five years on earnings concerns. The Australian dollar shed nearly 5% to near 62.90 yen.
The dollar fell 1.2% against the yen to 96.20 yen, just above a seven-month low of 95.94 yen on Thursday on trading platform EBS.
In a further sign of the spreading credit crisis, the International Monetary Fund was hurrying to approve by early November a package that would let some “top-tier” emerging market economies exchange local currencies for dollars to ease strains, officials familiar with the plan said.
So far, Hungary, Iceland, Belarus, Ukraine, Serbia and Pakistan are in talks with the IMF on economic programmes backed by financing. But the IMF denied market speculation that it is preparing a $1 trillion aid package.
Brazil’s central bank intervened on Thursday on the spot market to offer dollars and said it was ready to sell dollar swap contracts up to a hefty $50 billion. The central banks of Brazil, Turkey and Norway acted to boost liquidity.
Credit rating agency Standard & Poor’s cut its outlook for Russia to negative from stable on Thursday, warning of the costs of bailing out troubled banks and a rising risk of a budget deficit.