The yen soared to its highest level against the dollar in more than two years on Wednesday, as fears about credit market losses and the health of the U.S. economy led investors to reduce exposure to risk.
The dollar also hit a record low against the euro for the second straight day and fell below 109 yen for the first time since June 2005 as global stocks swooned and oil pushed toward $100 a barrel.
The low-yielding Japanese currency tends to do well in times of risk aversion because investors unwind carry trades that use cheaply borrowed yen to buy higher-yield currencies.
The higher-yielding Australian dollar, on the other hand, fell more than 2 percent against the greenback, and sterling hit a four-and-a-half-year low against the euro.
There's an overwhelming sense of malaise in the market, which fears the U.S. economy is slowing considerably and the Fed will have to cut rates in December, said Boris Schlossberg, senior strategist at DailyFX.com in New York. That's driving prices into the ground and will lead to further reductions in yen carry trades.
The dollar fell as low as 108.27 yen and last traded at 108.45 yen, down 1.4 percent. The euro was 1.3 percent weaker at 160.85 yen. The dollar hit an all-time low against the Swiss franc for the second straight day, dipping to 1.1025 francs.
Ashraf Laidi, chief market analyst at CMC Markets in New York, said the extent of the dollar's decline against the yen -- with a session high of 110.01 yen -- reflects the high degree of anxiety among global investors.
The euro hit a record high of $1.4856 before easing to $1.4825, little changed from late Tuesday. The dollar index, which measures the greenback against a basket of six currencies, also sank to a record low overnight but pared losses by mid-morning in New York.
STEERING CLEAR OF RISK
Risk appetites began to weaken on Tuesday after No. 2 U.S. mortgage finance company Freddie Mac reported a record loss, prompting fears it would be unable to provide liquidity to an already struggling home loan market.
Also on Tuesday, the Federal Reserve said the housing slump, tighter credit conditions and high energy costs would likely slow U.S. growth next year to between 1.8 percent and 2.5 percent, sharply below its June forecast for growth of 2.5 percent to 2.75 percent.
Oil homed in on $100 a barrel on Wednesday, while U.S. stock indexes fell by more than 1 percent, following Asian and European shares lower.
The Fed has cut rates by 75 basis points so far this year, and futures markets have fully priced in another 25 basis point cut at the U.S. central bank's next policy meeting on December 11.
Analysts said further sharp price moves are likely in the near term with U.S. trading desks shuttered on Thursday for the Thanksgiving holiday and likely to be thinly staffed on Friday.
This could prove a dangerous cocktail for the rest of the week, said Niels From, currency strategist at Dresdner Kleinwort in Frankfurt.
The demand for safer assets and thin trading conditions puts euro-dollar at $1.50 in the crosshairs, Schlossberg said. The euro has gained more than 6 percent on the dollar since the Fed began cutting rates in mid-September.
A Wednesday report showing U.S. consumer sentiment hit a two-year low in November had little immediate impact but added to the sense of longer-term gloom.
Analysts said consumer data due next month is more important, as it will follow the start of the U.S. holiday shopping season and tell how big a bite high gas prices and a housing slump are taking out of consumers' wallets.
(Additional reporting by Simon Falush in London; Editing by Leslie Adler)