Yen gains as growth concerns dampen risk appetite; Aussie stumbles

SINGAPORE (Reuters) - Safe-haven currencies such as the yen rose against the dollar on Wednesday, as a cautious mood prevailed on the first trading day of the year on concerns over global growth, the U.S. government shutdown and a slower pace of Federal Reserve rate hikes.

Japan Yen and U.S. Dollar notes are seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration

The yen gained 0.3 percent against the dollar to 109.39 in Asian trade. Trading volumes remained light as global markets reopened after the New Year’s Day holiday. Japanese markets remain closed on Wednesday.

The yen has strengthened for three straight weeks on investors’ lower appetite for risk.

“It’s still difficult to be strongly positive given all the uncertainties. Hopefully, there will be progress on trade talks but the market is cautious and that’s benefiting the safe havens such as the yen,” said Sim Moh Siong, currency strategist at Bank of Singapore.

Fears of a global slowdown were aggravated on Wednesday by a survey showing China’s factory activity contracted for the first time in 19 months in December as domestic and export orders continued to weaken.

With business conditions expected to get worse before they get better, China is expected to roll out more support measures in coming months on top of a raft of initiatives in 2018.

“This data confirms our view that the economy is weak and that stimulus needs to arrive quickly,” said analysts at ING in a note.

ING expects the Chinese government to speed up the delivery of infrastructure investment to support the economy, which will mainly be through projects governed by local governments.

The Australian dollar, whose fortunes largely depend on the Chinese economy to which Australia sends a bulk of its commodities, fell 0.5 percent to $0.7016.

The dollar gained 0.05 percent versus the offshore yuan at 6.8681.

While market participants remain concerned about the broader investment outlook, renewed hopes for a resolution to the U.S.-Sino trade dispute have provided some cause for optimism. On Sunday, U.S. President Donald Trump indicated that progress had been made towards a potential settlement of trade tensions which had plagued stock markets for much of 2018.

On Wednesday, the dollar index was relatively unchanged from Monday’s close, fetching 96.17.

Rising interest rates drove the dollar’s outperformance in 2018 with the Fed raising rates four times over the year, as unemployment remained at historically low levels and wage pressures rose.

However, the dollar has been under pressure in recent weeks as investors grow increasingly nervous about a slowdown in the U.S. economy and peak corporate earnings growth.

The U.S. 10-year Treasury yield fell by around 35 basis points over December to 2.69 percent as bond traders bet that the Fed would not be able to raise rates in 2019 due to slowing economic momentum.

The euro slipped 0.16 percent to $1.1446. Traders expect the single currency to remain under pressure as both growth and inflation in the eurozone remain below the European Central Bank’s expectations. The euro lost 4.4 percent of its value versus the dollar in 2018.

Elsewhere, sterling weakened by 0.15 percent to $1.2728. The British pound lost 5.5 percent versus the greenback last year due to Brexit woes.

With three months until the United Kingdom is due to leave the European Union, British Prime Minister Theresa May’s Brexit deal is floundering and traders expect sterling to remain under pressure.

Commodity currencies such as the Canadian dollar weakened as oil prices fell on fears of slowing global demand. The dollar gained 0.07 percent versus the loonie to C$1.3647.

Reporting by Vatsal Srivastava; Editing by Sam Holmes and Jacqueline Wong