Risk aversion buoyed the Japanese yen broadly in highly volatile trade on Friday as investors cut their exposure to riskier assets on deepening fears about the global financial system. A belief that myriad measures taken by global governments to ease pressures on jammed money markets were too little, too late sparked panic on financial markets, sending a global measure of world stock markets to a five-year low.
Government bonds were also jettisoned in the rush for cash. Fear gauges were reflected clearly in the FX options market with implied volatility on dollar/yen currency options for one-week and one-month periods spiking to their highest levels in 10 years.
Investors are now looking to the weekend's meeting of leaders from the Group of Seven nations. However, hopes for a comprehensive deal to help to solve the crisis are fading fast. "It is not clear we will see much from the G7 meeting and this will probably keep risk appetite under pressure," Rob Minikin, senior currency strategist at Standard Chartered said.
Increased risk aversion left the yen as the currency of choice, with the euro earlier falling to a three-year low of 132.80 yen and the dollar hitting a 6-1/2 month low of 97.92 yen. European stocks tumbled almost 8 percent, while US stock market futures pointed to a sharply lower open on Wall Street. "All the yen crosses are under heavy demand pressure as equities slump. The market is taking its cue from equity futures," Standard Chartered's Minikin said.
By 1145 GMT, the dollar was down 0.4 percent against the yen at 99.01, while the euro fell 0.7 percent to 134.24 yen with both pairs having moved in a wide range. As investors scrambled for cash, the dollar hit a 14-month peak against a basket of major currencies at 81.939 before retreating to trade up 0.2 percent on the day. The euro was down 0.3 percent against the dollar at $1.3557.
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