FOREX-Yen, Swiss franc and euro sought in risk-asset rout, EM savaged

Thu Jan 23, 2014 11:49pm EST

Related Topics

* China, EM worries spark selloff in risk assets

* Euro helped by strong business data, rising c/a surplus

* Swiss franc benefits from country's move to dampen housing boom

* As EM currencies savaged, Aussie & loonie also hit hard

* Dollar not helped by fall in U.S. bond yields

By Ian Chua and Hideyuki Sano

SYDNEY/TOKYO, Jan 24 (Reuters) - The yen and Swiss franc held firm on Friday, having charged higher overnight as worries about a slowdown in China and turmoil in some emerging markets spurred demand for the safe-haven currencies.

The euro also held onto the previous day's hefty gains, which stemmed from data that showed a strong euro zone recovery and fuelled a shift of funds into the common currency from emerging markets.

Among the wild moves in emerging markets, the Argentinian peso suffered its sharpest fall since 2002 as the country's central bank gave up on defending the currency.

Even the normally stable Hong Kong dollar seemed to be coming under pressure as well.

The concern about China was rooted in a weak January factory output survey.

"China is, in a way, the kingpin of emerging markets. When the Chinese economy suffers, so do a lot of emerging currencies," said Sho Aoyama, senior market analyst at Mizuho Securities in Tokyo.

"The other side of the coin is, when investors avoid risk, they buy currencies backed by a current account surplus", he added. Data published on Thursday showed the euro zone current account surplus hit a record high in November.

The dollar fell more than 1 percent against the yen and Swiss franc on Thursday, reaching a two-week low of 102.97 yen and a three-week low of 0.8964 francs.

The dollar last stood at 103.40 yen, up slightly from late U.S. levels thanks to bargain-hunting from Japanese importers. Against the Swiss currency, it fetched 0.8988 franc.

The Swiss franc had additional support from the Swiss government's decision to raise banks' capital requirements for mortgage book to dampen Switzerland's housing market boom.

The measure, seen as a balancing act to curb asset bubbles while maintaining its peg of the franc to the euro, suggested Switzerland could come under more pressure to tighten its monetary policy in the future.

The euro held at $1.3683, having jumped 1.1 percent and rising as far as $1.3699 at one point on Thursday, a near two-week high.

Helping the euro was the Markit's gauge business activity, which jumped to 53.2 in January from 52.1 last month, beating all forecasts in a Reuters poll of 25 economists and marking its highest reading since mid-2011.

In contrast, the dollar nursed heavy losses after suffering its biggest one-day fall in four months against a basket of major currencies, undermined by a drop in U.S. benchmark yields to a six-week low.

The dollar index was last at 80.518, having skidded nearly 1 percent on Thursday.

EM BLUES

Risk sentiment soured after a survey released on Thursday showed China's vast manufacturing sector kicked off 2014 on a soggy footing.

A number of emerging economy currencies came under pressure, with the Turkish lira hitting a record low against the dollar, the South African rand slumping to a 5-1/2 year trough and the Russian rouble falling to its weakest in nearly five years.

Currencies from Brazil, Venezuela and Mexico all took a beating as well.

This is partly because many still suspect the Federal Reserve will continue to unwind its massive bond-buying stimulus at next week's policy meeting.

That move is seen as having potential to hurt many markets that had long benefited from floods of cash the Fed's huge money printing programme has created.

"We would be cautious of fading this risk aversion move given the scale of some of the losses in commodity and emerging market currencies, and the euro may stay better supported in the near-term as euro-funded risk positions are covered," analysts at BNP Paribas wrote in a note to clients.

The Argentine central bank's decision not to defend that currency raised eyebrows.

"The currency has been falling for most of the last couple of years anyway so few people would have cared. But it was a symbolic move," said Takako Masai, a manager of forex at Shinsei Bank in Tokyo.

"We will have to see whether this risk-off trade will subside today. If it does, then I wouldn't be too worried about it spiralling into more sinister moves," she said.

Dollar-bloc commodity currencies were also hit hard with the Australian dollar floating near a 3-1/2 year trough of $0.8732 hit on Thursday, while the Canadian dollar slid to a 4-1/2 year low of C$1.1174 per dollar on Thursday before stabilising around C$1.1106.

The New Zealand dollar outperformed its Aussie and Canadian peers, slipping just a touch to $0.8282. Investors were unwilling to sell the kiwi amid speculation the Reserve Bank of New Zealand could hike interest rates as early as next week.

Sterling was another standout performer, continuing its winning ways to reach a near three-year high of $1.6644 .

It is supported by growing expectations that robust economic data, including a sharp fall in jobless rate, will lead the Bank of England to raise interest rates sooner than previously flagged.

The pound's gain came even as Bank of England Governor Mark Carney said on Thursday that there is no need for an immediate rate hike and that the bank is not looking at employment alone to assess the economy.

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