The dollar fell below the psychologically key 100 yen mark for the first time in over a decade on Thursday, as well as plumbing fresh record lows versus the euro, the Swiss francs and a basket of major currencies.
Investors remained on edge about the ailing US economy and the likely extent of future interest rate cuts as the Federal Reserve battles to stave off a recession. News of troubles at hedge funds and subsequent slumps in equity markets came amid a growing sense that Fed plans to pump hundreds of billions of dollars of liquidity into the banking system will not be enough to prevent further writedowns, losses and possible bankruptcies.
This risk averse environment benefited the safe haven Swiss franc and low yielding yen. The break of the 100 mark in dollar/yen and the approach of key levels in other currency pairs made markets jittery - one-week implied volatility in dollar/yen, a key pricing component in currency options, surged to seven-month highs above 20 percent.
"It's a broad fall of the dollar. The economic situation in the US is really black, the market is now expecting more and more cuts from the Fed and we have more and more news of financials experiencing difficulties," said Carole Laulhere, currency strategist at Societe Generale in Paris.
"Even if the Fed tried to give liquidity to the market at the beginning of the week it was not enough to restore the confidence of market participants, and I think risk aversion will continue for the time being."
The dollar dropped to 99.77 yen, according to Reuters data, a mark last seen in late 1995. By 1039 GMT it had recovered a little to 100.27 yen, but was still down 1.25 percent on the day and nearly 10 percent for the year to date. The dollar also hit a record low against a trade-weighted basket of six major currencies at 71.821 and a historic low at 1.0047 Swiss francs.
With the Swissie approaching parity, investors were looking to see whether the Swiss National Bank welcomed the strong currency as an inflation-fighting tool, or highlights its negative impact on growth.
The SNB is due to issue a statement after its 1300 GMT rate decision, where policy is widely seen on hold at 2.75 percent. A rate decision is also due at the same time in Norway, where a small minority are expecting a hike to 5.5 percent.
In contrast to expectations of 75 basis points of Fed rate cuts this month, markets are only pricing in 50 basis points of ECB easing by the end of the year. The euro surged through $1.56 to reach $1.5624 according to Reuters data despite European Central Bank President Jean-Claude Trichet expressing concern on excessive FX moves.
"These kind of remarks have not been threatening enough so far but the intervention risk has to increase on a looming $1.60 euro/dollar level," CIBC World Markets said in a client note. There is also speculation about whether Japan will resume FX intervention after a four-year break, although analysts noted that on the BOJ's trade-weighted basis the yen is still around 20 percent weaker than it was back then.
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