* Worries that Fed may taper bond buying hurt stocks
* Weak China PMI drive Nikkei down more than 7 percent
* Yen, Swiss franc rally on safe-haven flows
By Wanfeng Zhou
NEW YORK, May 23 The dollar was on track for its
biggest daily drop in more than five weeks against the yen on
Thursday after a sharp slide in Japanese stocks and weak Chinese
factory activity data prompted a rush for the safe-haven
The yen also rallied versus the euro and other currencies,
further buoyed by a jump in 10-year Japanese government bonds
yields, to 1.000 percent, the highest in a year.
China's factory activity shrank for the first time in seven
months in May, a survey showed, deepening fears that China's
economic recovery has stalled and a sharper cooldown may be
Concerns that U.S. monetary stimulus could be scaled back,
sparked by Federal Reserve Chairman Ben Bernanke's testimony on
Wednesday, also weighed on markets and drove Japan's Nikkei
share index down 7.3 percent on Thursday, its biggest
one-day drop since a slide two years ago in the wake of the
"The yen's outperformance Thursday served as a reminder that
despite its bearish long-term outlook, it stands to rally when
investors turn skittish and need a safer place to hide," said
Joe Manimbo, senior market analyst at Western Union Business
Solutions in Washington.
Analysts said the dollar could drop further against the yen
if stocks continued to decline. But they expected the trend of
yen weakness and dollar strength to remain given aggressive
easing in Japan and the prospect of tighter U.S. policy.
"I still think the scope of easing that the government is
doing in Japan is going to have an effect and eventually is
going to drive dollar/yen higher," said Fabian Eliasson, vice
president of currency sales at Mizuho Corporate Bank in New
The yen hit a two-week high of 100.82 to the dollar,
reversing a slide to a 4-1/2-year low of 103.73 yen on Wednesday
after Bernanke told Congress the Fed could "in the next few
meetings take a step down" in its bond buying.
The dollar was last at 101.79 yen, down 1.3 percent for the
day, the worst daily performance since mid-April. Some $7
billion in yen changed hands on Thursday on Reuters Dealing, the
highest daily volume since at least September.
At the session peak, the yen rose more than 2 percent
against the dollar and the euro.
The euro slid to a two-week low of 129.94 yen,
having touched a 3-1/2-year peak of 133.77 yen on Wednesday. It
was last at 131.73 yen, down 0.7 percent.
Against the dollar, the euro zone common currency was
up 0.6 percent at $1.2938. The euro got a modest lift from data
showing the downturn across euro zone businesses eased slightly
But the numbers in the euro zone PMI business survey pointed
to another contraction in the 17-member bloc in the second
quarter. Analysts expected the euro to stay weak against the
dollar, given concerns that the Fed will taper its
asset-purchase program while the European Central Bank could
ease monetary policy further.
The Swiss franc, another safe haven that has sold off
lately, rallied. The dollar fell 1 percent to 0.9682 franc
, while the euro lost 0.4 percent to 1.2528 francs
Some traders said the market's reaction to Bernanke might be
short-lived. They focused on Bernanke's caveats that the Fed
would need to see more improvements in the economy before
reducing stimulus, although the minutes from its most recent
meeting showed some policymakers were willing to cut bond buying
as early as June.
James Bullard, president of the Federal Reserve Bank of St.
Louis, said on Thursday that he did not think the Fed was "that
close" to starting the process of winding down its support
although it was the likely next step if the economy continued to
improve and inflation picks up.