MW: Volatile equities lift yen; dollar up vs. euro
By Nick Godt & William L. Watts, MarketWatch
NEW YORK (MarketWatch) -- Risk aversion remained the key theme for foreign exchange markets Friday, as sharp swings in equities trading seemed to further lift to the Japanese yen.
The dollar bought 101.15 yen, down from 101.62 yen in North American trade late Thursday. The euro fell 0.7% against the Japanese unit to 136.76 yen.
The euro fell to $1.3434 against the dollar from $1.3463.
The dollar index , which measures the greenback against a trade-weighted basket of six major currencies, was at 82.350, up slightly from 82.287.
"Volatile stock markets and swinging risk aversion continue to prevail, confirming usual themes on foreign exchange: both the Japanese yen and the U.S. dollar will continue to outperform, mostly to the detriment of the euro" and the dollar vs. the British pound, wrote strategists at UniCredit MIB.
On Wall Street, the Dow Jones Industrial Average fell 150 points, or 1.7%, to 8,821 in early trade.
A U.S. report showing that builders broke ground on fewer homes than expected last month saw the dollar lose some steam against the yen.
"Dollar/yen and other carry trades followed the movements in U.S. equities, which is why the recovery in risk appetite has helped these currency pairs," Kathy Lien, director of currency research at Global Forex Trading, wrote in a research report.
"However for the average investor who may not be day trading the financial markets, the sharp volatility may actually keep them on the sidelines, which could limit a meaningful recovery for the high-yielding currencies," Lien wrote.
During the financial crisis, the yen has served as the de facto safe-haven currency. Rising risk aversion leads some market players to abandon or reverse once-popular carry trades that had centered on borrowing in yen and buying assets denominated in higher-yielding currencies.
Such positions pressure the yen, because at 0.5%, Japan's benchmark interest rate is the lowest in the developed world. Read about risk aversion and the yen.
European equities rose early, bouncing back from heavy losses on Thursday. But the rebound was seen as part of a broader pattern of volatile, choppy trade action, which did little boost to the appetite for risk. See Europe Markets.
Meanwhile, the VIX index , a volatility gauge, hit an all-time high above 80 on Thursday and remains elevated near 70, strategists said.
Economists at BNP Paribas said interbank lending rates and other measures of tensions in money markets are likely to continue their recent decline, helping to ease risk aversion.
High VIX readings are also likely to prove unsustainable, they said, and further policy moves by central banks and fiscal policy makers should move to further ease tensions.
That should provide eventual support for the dollar-yen pair. The euro may also gain versus the dollar off of support for the euro/yen cross, they said.
