The yen had its biggest rise against the dollar in six months in volatile trading on Thursday as investors fearing a global credit crisis exited risky trades financed by borrowing the Japanese currency.
The yen's climb was broad and steep, reaching its highest since November against the euro and soaring against high-yielding currencies like the Australian and New Zealand dollars. Unwinding carry trades had accelerated on concerns of international credit problems.
The Japanese carry trades are unwinding somewhat violently, said Greg Anderson, director of foreign exchange strategy at ABN Amro Bank in Chicago. In the last two months, the dollar declined from 124.16 yen in June to a 14-month low reached on Thursday around 112.00.
In late afternoon New York trading, the dollar was 2 percent lower at 114.20 yen. The yen was on track for its biggest daily gain versus the U.S. currency since a big shakeout in carry trades in late February.
The euro slipped more 2 percent to 153.20 yen. Earlier the euro had fallen as low as 150.03 yen, according to electronic platform EBS.
The selling in other cross-yen pairs was active as options barriers were smashed and automatic sell orders triggered, with the Australian and New Zealand dollars falling 4.95 and 4.44 percent, to 90.51 and 78.64 respectively.
The Australian dollar has now lost more than 12 percent against the yen in the last six sessions at current prices, while the New Zealand dollar is down more than 14 percent against the yen.
GLOBAL RISK AVERSION CREATES VOLATILE TRADING
The euro was flat against the dollar at $1.3425.
After a three-day rise, the dollar index fell 0.1 percent, weakening against a basket of major currencies after reports showed softer-than-expected housing starts in July and slowing Mid-Atlantic business conditions in August.
The weak data built on anxiety about slowdowns in the U.S. economy from the housing and subprime mortgage sectors.
The sharp increase in risk aversion followed Wednesday's plunge in share prices of Countrywide Financial Corp. (CFC.N: Quote, Profile, Research) , the largest U.S. mortgage lender, amid rumors of the companies' credit problems.
In the wake of the new economic data, the three major U.S. stock indexes fell more than 2 percent at midday, but recovered most of the ground, with the S&P 500 Index (.SPX: Quote, Profile, Research) finishing the day positive and the Dow Jones industrial average (.DJI: Quote, Profile, Research) down just 0.12 percent.
For all of Thursday (the dollar: Quote, Profile, Research) traded down against the yen, but the dollar recovered somewhat later in the day, as U.S. equities markets rebounded, said David Powell, foreign exchange strategist at IDEAglobal in New York. The yen is keeping in tune with its latest behavior, taking direction from the stock markets.
Reflecting the fears of further equities turmoil, the implied volatility on one-month dollar/yen options -- which measure the expected volatility in a currency pair over a given period -- soared above 17 percent earlier to its highest in over seven years. (Additional reporting by Nick Olivari, Kevin Plumberg, Gertrude Chavez-Dreyfuss and Vivianne Rodrigues in New York)