LONDON: The yen soared on Wednesday after crude oil prices fell to near 13-year lows and risk appetite waned, with the dollar dropping to a one-year low as investors revised expectations of how much the Federal Reserve would raise interest rates.
The dollar fell 1.3 percent to 115.97 yen in London trade, its lowest since January 2015. It recovered to 116.48 yen on reports an unnamed Japanese official said Tokyo was closely watching the market.
The dollar had risen to 118.115 on Tuesday, after risk appetite showed signs of recovering amid a bounce in crude oil prices and hopes of further stimulus in China.
But the rally fizzled out when oil resumed its downward slide, hurting sentiment towards stocks and encouraging investors to buy safe-haven assets like the yen, Swiss francs , German Bunds and U.S. Treasuries.
"The yen has shown maximum sensitivity to risk sentiment in the recent weeks," said Manuel Oliveri, a Credit Agricole currency strategist. "The upside for the yen, though, is likely to be capped before the Bank of Japan meeting next week, given they too are struggling with weakening inflation prospects."
Lower oil prices and the threat of deflation are posing a challenge to policymakers. Talk of recession risk in the United States has grown as oil prices fall, market volatility rises and domestic activity slows. Investors are now pricing in just one rate increase by the Fed in 2016.
Cheap oil will play a major role when the Bank of Canada meets later on Wednesday. The median forecast in a Reuters poll was for no change in policy, but some predicted the bank would cut them to blunt the effect of lower oil prices.
The Canadian dollar was heading for its 13th straight trading day of losses against its U.S. counterpart, hitting C$1.4689 per dollar, its lowest in 13 years.
"With the market split on the outcome, the Canadian dollar should react either way, though we suspect there would be a bigger move on a cut," said Adam Cole, head of G10 currency strategy at RBC Capital.
Sterling was still smarting from losses on Tuesday after comments from Bank of England Governor Mark Carney. He said he had no timetable for raising rates and warned more damage would come from a slowdown in China, the world's second biggest economy.
The pound was flat at $1.4155 having hit a seven-year low of $1.4125 earlier in the day, its lowest since March 2009.
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