LONDON (Reuters) - The yen gained sharply against both the dollar and euro on Tuesday as investors sought the traditional safety of the Japanese currency amid end-of-year nerves over economic risks ahead.
The prospect of Greece dropping the euro returned to haunt the single currency after a failed effort to elect a new Greek president on Monday, but there are broader concerns over growth and the effects of six years of money-printing heading into 2015.
Concerns over global demand have shown up in a collapse in oil to less than $60 a barrel and crude prices were heading lower again on Tuesday, dragging stock markets and the dollar with them.
A 1 percent rise for the yen knocked the U.S. currency back off more than 8-1/2 year highs against a basket of currencies. The euro was also higher at $1.2185, recovering from a 29-month low.
"What we're seeing this morning is a squeeze on some of the existing positions in a very illiquid market," said Michael Sneyd, a currency strategist with BNP Paribas in London.
"Particularly the yen move against the dollar happened in very low volumes overnight. All of this is contrary to the main trends that we're talking about at the moment."
A stronger dollar, driven by rising U.S. interest rates at a time when Japan's and Europe's will be held at rock bottom, is most major banks' central forecast for 2015. The greenback had retreated to 119.59 yen by 0840 GMT.
"It is the typical dampening of risk appetite that is weighing on stocks and in turn dollar/yen," said Shinichiro Kadota, chief Japan FX strategist at Barclays in Tokyo.
"It could remain a factor for the dollar if equities are unable to recover early next year in wake of the Greek situation."
The euro's slip against the dollar has been limited thus far, down only 0.2 percent on the day, as the outcome of the Greek parliamentary vote was already priced in by some.
But other participants urged caution, suggesting political turmoil in Greece was only in its early stages.
