The Yen rose to its highest level against the Dollar since June 2005 as investors exited riskier assets after soft US retail sales data added to fears the economy could be headed for recession. Weak outlooks about growth prompted some investors to reduce risky positions and unwind carry trades (borrow in a low-yielding currency, Yen or Chf, to buy relatively high-yielding currencies). Analysts said concerns that slowing spending by US consumers would spread the slowdown abroad also weighed on other currencies.
UsdJpy was down 1.41% to 106.77, after dropping as low as 106.59. AudUsd dropped 1.64% to 0.8836, well off the day's high of 0.9019. The Euro fell to a four-month low against the Yen of 157.69 before recovering some ground to trade at 158.03, down 1.85%. Heavy selling against the Yen pushed the Euro down against the Dollar to 1.4802 -0.45%, off the day's high of 1.4922. UsdChf slipped 0.16% to 1.0913 after touching 1.0855 low.
A crisis in the US financial sector has been weighing on the rest of the economy and the Dollar. It also boosted currencies such as the Swiss franc and the Yen that were previously sold rather indiscriminately because of their low yields.
Citigroup, the largest US bank by assets, reported its first quarterly loss since its creation in 1998. Citigroup was the first big bank this week to report Q4 earnings, and the spotlight will now shift to others, including JP Morgan on Wednesday. Investors are looking to see how much the credit crisis is damaging banks' bottom lines and increasing the risk of a recession.
To keep the economy from contracting, financial markets expect the Federal Reserve to cut benchmark overnight interest rates by at least a 50bp when its monetary policy committee next meets on Jan. 29-30. Lower rates reduce the attractiveness of Dollar-denominated securities and demand for the greenback.