FOREX-Risk aversion boosts yen, dollar suffers
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LONDON, Jan 3 (Reuters) - The yen rallied to five week peaks against the euro and dollar on Thursday, boosted by a move to risk aversion as investors worried about the impact of a slowing U.S. economy on global growth and equity markets sold off.
A run of weak U.S. data, including news on Wednesday of contraction in the manufacturing sector in December, has prompted markets to fully price in a 25 basis point Federal Reserve rate cut at the end of the month, and to give a roughly one-in-five chance of a bigger 50 basis point move.
That has sent the dollar to one-month lows versus a basket of major currencies, with losses of 1 percent since the start of 2008 after a fall of 8.4 percent in 2007 -- its worst annual performance in four years.
The yen meanwhile has added around 2.5 percent versus the dollar and 1.5 percent versus the euro in the first few days of January as risk aversion has made investors reluctant to put on carry trade bets funded by cheap borrowing in the low-yielding Japanese currency.
"It's a risk aversion play and the yen seems to be the main benefactor of that. There are still doubts about the outlook U.S. economic activity and equally concerns that in early 2008 we will still have wobbles with regards to sentiment on the banking sector in the U.S.," said Daragh Maher, senior currency strategist at Calyon.
"Equity markets have started off poorly and as a result risk aversion is back in play."
By 1057 GMT the euro had risen to a one-month high of $1.4764 according to Reuters data EUR=. The dollar also fell to a one-month low against a basket of major currencies, at 75.797 .DXY.
It was down over 1 percent at 108.53 yen JPY=, while the euro was down 0.95 percent at 159.86 yen EURJPY=.
Traders said that currency moves were accentuated by relatively thin volumes, as not all market participants have returned from their Christmas and new year holidays as yet.
Some analysts said the absence of yield-seeking outflows from Japan, which is on holiday until Friday, was a factor propping up the yen in the first trading sessions of 2008.
RISK AVERSION
The UBS FX risk index rose to 1.58, suggesting that risk aversion is at its highest in around two weeks thanks to rising volatility in equities and currencies and widening spreads between emerging markets and high-yielders versus safe-haven U.S. Treasuries.
The weak dollar has helped push up oil to around $100 a barrel and gold above $850 an ounce, both fresh record highs, by making crude and bullion cheaper for non-U.S. buyers. The strength in safe-haven gold is also another sign of risk aversion. Continued...
