The yen rose broadly on Thursday, recovering from the previous day's sharp drop, and high yielding currencies fell as the spotlight swung back to troubled credit markets with investors cautious about risky carry trades.
The yen brushed off a rebound in European and Asian stocks and climbed after the Royal Bank of Scotland (RBS.L: Quote, Profile, Research) said it was cutting back its collateralized debt obligations unit after a drop in market appetite, confirming the departure of a leading CDO executive.
High-yielding currencies also took a hit after an Australian hedge fund filed for bankruptcy protection on Wednesday in the United States, while smaller consumer finance companies in New Zealand have collapsed in the past week.
Traders cited rumors in the market of some large European banks suffering big losses in the credit markets, driving the euro down more than 1 percent against the yen and the New Zealand dollar down more than 2 percent.
The fall in the single European currency came just a day after it posted its biggest one-day rise versus the yen since March 2004 as a surge in Wall Street shares helped relieve some of the fears about a worsening credit squeeze.
Yesterday's move was somewhat overdone and risks remain firmly on the downside, said Derek Halpenny, senior currency economist at BTM UFJ.
Ultimately we are still in a highly uncertain, highly risk averse environment and we will remain so until there is light at the end of the tunnel on mortgage funding, he added.
By 7:15 a.m. EDT the euro was down 1.1 percent at 157.17 yen, having swung sharply between 159.00 and 154.50 yen over the past two days. The move also dragged the euro down half a percent versus the dollar, to $1.3614.
The dollar slipped 0.65 percent to 115.43 yen after posting its biggest daily percentage gain against the yen since January 2005 on Wednesday due to a surge in U.S. stocks.
The high yielding pound fell 1.2 percent versus the yen to 231.64 yen.
The Bank of England said on Thursday it had lent directly via its standing lending facility for the second time this month, to the tune of almost 1.6 billion pounds.
The high-yielding Australian dollar and New Zealand dollar both shed more than one percent against the greenback.
EYES ON BERNANKE
Currencies have followed movements in global stock markets as investors scour for more signs of how turmoil in the U.S. subprime mortgage market is impacting credit markets around the world, as well as the broader U.S. economy.
In a letter released on Wednesday, Fed Chairman Ben Bernanke reiterated that the central bank was prepared to act as needed to ensure credit market problems do not adversely affect the economy, fuelling speculation about a cut in the benchmark rate.
But Fed Watcher Greg Ip said in a Wall Street Journal article on Thursday that the Fed is not rushing to cut benchmark interest rates because it wants to break investors' view that the central bank is there to bail them out.
A fresh steer on the Fed's thinking could come from a Bernanke speech on Friday. Data will also be watched, with Thursday featuring revised second quarter U.S. growth figures and weekly jobless claims data.
While we expect Bernanke to prepare the market for a rate cut, he will prevent at any price leaving the impression that the Fed stands ready to bail out risky investors, said BNP Paribas in a note to clients.