The dollar edged higher against the yen on Monday after the Federal Reserve cut its discount rate late last week, but investors cautiously waited to see if the US central bank's action would help settle nerves over turmoil in the credit sector.
The New Zealand dollar tumbled 2 percent against the dollar and the yen at one point as market players rushed to slash risky carry trades, in which investors borrow the low-yielding yen to fund investments in high-yielding currencies and assets.
The yen hit a 14-month peak against the US currency on Friday then fell after the Fed's unexpected decision to cut the interest rate charged on its direct loans to banks helped restore some confidence in the US share market.
A 3 percent jump in Tokyo shares along with other Asian stocks on Monday helped investors recover their appetite for risk, although the impact was rather limited. Market players said it was still too early to say if financial markets had settled down from jitters over a global credit squeeze.
"The yen's rise may slow as fears about falling stocks ease after the Fed's action," said Masafumi Yamamoto, a currency economist at Nikko Citigroup in Tokyo. "But in the long run, the market will remain vulnerable to the unwinding of carry trades while bad news related to subprime mortgage problems is likely to surface more towards the year-end," Yamamoto said.
The dollar rose to 114.65 yen from around 114.35 yen seen in late US trade on Friday after having swung between 113.68 and 114.84 yen in Asian trade. "Those who have sold the dollar a bit too much bought it back after the Fed's action and a rebound in stocks," said a trader at a big Japanese bank. "But the move was rather technical and nothing more than covering short dollar positions."
Traders said Japanese exporters returning from summer holidays were rushing to sell the US currency to repatriate earnings from overseas, after seeing the dollar diving as low as 111.60 yen on Friday, its lowest since June 2006.
The euro was up 0.4 percent against the yen at 154.65 yen after falling as low as 153.40 yen earlier, while edging higher against the dollar at $1.3495. The New Zealand dollar fell about 0.7 percent against the dollar to $0.6915 after falling 2 percent earlier. The kiwi hit an eight-month low of $0.6643 on Friday. The kiwi also fell 0.5 against the yen to 79.20 yen after sliding 2 percent in early trade as investors rushed to exit carry trades.
The high-yielding kiwi was also pressured by caution over the impact from more than NZ$2 billion of eurokiwi and uridashi bond redemptions due Monday. The Australian dollar was down about 0.3 percent against the dollar at $0.7955. "Investors are busy cutting long positions in high-yielding currencies and buying the dollar, ignoring market speculation about a possible cut by the Fed" in the key federal funds rate, said Kengo Suzuki, a currency strategist at Shinko Securities, adding that such a view typically reduces dollar's yield advantage.
The Fed on Friday cut the discount rate it charges on direct loans to banks by 50 basis points to 5.75 percent, and said US economic growth could slow in light of tightening in the credit market. The central bank's statement fuelled a market view that it could be moving towards lowering its benchmark federal funds rate, which it held at 5.25 percent.
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