US dollar sinks versus yen

The US dollar slumped versus the yen on Thursday, squeezed by Wall Street's plunge as fears of a world-wide downturn that was much deeper than initially thought made investors seek shelter in the safest assets. The greenback and yen, meanwhile, rose against the euro and currencies of nations with high interest rates, like the Australian and New Zealand dollars, as investors sold risky assets such as stocks and commodities financed by loans denominated in the US dollar and the Japanese unit.
Currency investors continued to track movements in the US stock market, with the S&P 500 index sliding to an 11-1/2 year low as optimism about a deal for the ailing auto sector faded. US Senate Democratic leader Harry Reid said there has been no viable auto industry plan "that can be passed by the House and Senate, and signed by the President."
Earlier, US stocks rallied after a Senate Democratic aide said senators had reached a bi-partisan agreement on auto aid, briefly boosting the dollar versus the yen. That bounce, however, was short-lived. "The price action in the stock market just reinforces the fact that there's a lot of negativity out there," said Joe Francomano, vice president of foreign exchange at Erste Bank in New York.
"So you're seeing the risk aversion trades - dollar and yen - perform well. And the only reason they're performing extremely well is because everybody continues to exit out of risk currencies such as the euro, sterling, and commodity currencies." The dollar fell as low as 93.74 percent, a three-week low. It last traded at 94.07, down 1.9 percent. The euro fell to 116.82 yen, also a three-week trough, before climbing back up to 117.12, down 2.4 percent.
The dollar was also weighed down by data showing the number of Americans filing for jobless benefits spiked to a 16-year high of 542,000 last week. A report indicating that US mid-Atlantic factory activity sank to an 18-year low further added to the gloom.
Against the dollar, the euro slipped 0.5 percent to $1.2458 while sterling fell 1.6 percent to $1.4726. The dollar rose 1.0 percent to 1.2243 Swiss francs after the Swiss National Bank cut interest rates by a full percentage point, citing worsening economic conditions.
The high-yielding New Zealand dollar fell 4.0 percent to a nearly six-year low of US $0.5195 while the Australian dollar plunged 4.5 percent to US $0.6077. In the US, analysts said investors remained nervous about the automakers, which are seeking $25 billion in emergency loans from Congress, and the viability of banking giant Citigroup, whose shares fell below $5 to their lowest price in nearly 14 years.
That will ensure continued gains for the dollar against most currencies save the yen. "Asset and currency sales against the dollar are still likely to continue," said Brown Brothers Harriman in a research note on Thursday, although it warned of a short-term correction in the US currency given how far it has risen.
But it added that the dollar's bullish medium-term trend remains intact. Brown Brothers cited estimates suggesting hedge funds face a further $600 billion in redemptions, equivalent to $60 trillion of assets that would need to be unwound at a leverage ratio of 10 to 1. That should mean more flows for the dollar in the near term.