Dollar sinks vs. yen as U.S. Treasury curve flashes warning

NEW YORK (Reuters) - The dollar fell against the safe-haven Japanese yen on Friday as dismal U.S. manufacturing data fuelled worries about the wider economy, and Treasury bond yields signalled growing fears of a recession.

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The dollar, however, rose against the euro as a much weaker-than-expected German manufacturing survey raised concerns that Europe’s powerhouse economy may be slowing.

On Friday, the spread between 3-month Treasury bills and 10-year note yields inverted for the first time since 2007 after U.S. PMI manufacturing data missed estimates. This inversion of the yield curve is widely seen as a leading indicator of recession.

“You have to take it seriously that it is a signal for slowing growth or a potential recession in the next 12 to 18 months. This is what the Fed looks at closely,” said Sean Simko, head of global fixed income management at SEI Investments Co in Oaks, Pennsylvania.

The dollar was 0.66 percent lower against the yen at 110.07, a nearly six-week high for the Japanese currency.

“The recovery (in the yen) is not on the strength of the Japanese economy, it’s more about safe-haven flows,” said Alfonso Esparza, senior currency analyst at OANDA in Toronto.

Japan is the world’s biggest creditor nation, and its currency benefits when Japanese investors repatriate funds in times of financial or geopolitical stress.

The dollar, which came under pressure after the Federal Reserve surprised investors on Wednesday by abandoning all plans to raise interest rates this year, found some relief from a weaker euro.

“March’s flash PMIs add to evidence that GDP growth was subdued in the three largest advanced economies in Q1, with Germany continuing to take the brunt of the global manufacturing slowdown,” Simon MacAdam, global economist as Capital Economics, wrote in a note.

The euro was 0.69 percent lower against the greenback.

“It helps to reinforce the idea that we are looking at a more meaningful and more widespread slowdown than markets had anticipated a few months ago,” said Karl Schamotta, director of foreign exchange strategy and structured products at Cambridge Global Payments.

“What we are seeing is sort of a recognition that the Fed is reacting to deeper risks in the global economy,” he said.

The British pound, weighed down by fears Britain could exit the European Union on March 29 without a deal in place, recovered overnight when EU leaders gave Prime Minister Theresa May a two-week reprieve to decide how Britain would leave.

The pound was 0.74 percent higher against the dollar.

The Canadian dollar weakened to an 11-day low against its U.S. counterpart as data supported the view of a slowing Canadian economy.

Reporting by Saqib Iqbal Ahmed; additional reporting by Richard Leong; Editing by David Gregorio, Richard Chang and Jonathan Oatis