The Yen felt on Wednesday as US stocks rallied at the close, boosting demand for riskier assets. Earlier, declining stocks in the United States and Europe encouraged investors to reduce exposure to riskier assets despite the Federal Reserve's hefty interest rate cut on Tuesday. Moves in stock markets are seen as a barometer of investors' appetite for carry trades (borrowing Yen or other low-yielding currencies, to buy higher-yielding assets).
The Fed's 75bp reduction in its benchmark overnight lending rate, to 3.5%, did little to calm investors' fears of a US recession and its impact on the global economy, analysts said. The Fed is widely expected to cut rates again at its next policy meeting on Jan. 29-30.
Investors continued to fear a possible recession in the world's largest economy and wait on ECB to give indication that they may intend to follow the Fed's rate cut or not.
Yesterday, UsdJpy dropped to 104.97, its lowest since May 2005, before recovering up to 106.75 -0.32%. UsdChf slipped 0.46% to 1.0919. Currencies such as the Yen and CHF tend to attract flows during periods of uncertainty as the low interest rates reflect the capital surplus of their respective countries.
Analysts said investors were also disappointed that other central banks, particularly the European Central Bank, had not followed the Fed's emergency interest rate cut. Euro zone interest rate futures reflect expectations of around 75pb of ECB easing this year from the current 4 percent, with the first cut expected before June. Futures at the start of January had pointed to the ECB being on hold.
New Zealand's central bank left interest rates unchanged at 8.25% as expected. NzdUsd last traded down 0.31% at 0.7634.