The yen fell sharply and the euro rose on the dollar after news that Dubai had averted a possible debt default, encouraging investors to rush back into riskier and higher-yielding currencies. Dubai said it had received $10 billion from Abu Dhabi to help it repay $4.1 billion in an Islamic bond maturing on Monday. Last month, news that government-controlled holding company Dubai World might default rattled financial markets and led to a sell off in the euro and riskier assets including the high-yielding Australian dollar.
The dollar shot up against the yen by about 0.5 percent to 88.90 yen after the statement as currency players were forced to cover short positions. The euro also jumped about 0.8 percent before retreating to near 130 yen. "The announcement eased concerns about the Dubai debt troubles to some degree, but it will likely be temporary and the positive impact on stock and currency markets seems to be short-lived," said Jun Kato, a senior analyst for Shinkin Central Bank Research Institute in Tokyo.
The yen had benefited when worries about Dubai were at their height in November, hitting a 14-year peak against the dollar as investors unwound risker trades and bought the Japanese currency back. The low-yielding yen tends to be used in carry trades to fund investments into riskier assets, and it has a tendency to rise when those trades get unwound.
It has retreated as those worries have subsided but was gaining earlier in the day, when Asian stocks were sliding, as investors unwound risky trades in currencies such as the Australian dollar. "Market players have been expecting this issue to move in this direction.
If this had not materialised, it would have given people pause," said Kimihiko Tomita, head of foreign exchange at State Street Global Markets in Tokyo. When news of Dubai's debt woes emerged a few weeks ago, market players had sold the euro and bought the yen, Tomita said.
Monday's statement may have helped spur some short-covering in the euro against the yen, although such moves were likely relatively mild, Tomita said. The dollar pulled off the day's lows to stand 0.4 percent down on the day at 88.65 yen after dipping as far as 88.36 yen earlier on trading platform EBS. It was well above a 14-year low of 84.82 yen struck last month.
A manager for a Japanese trust bank said the currency market reaction had been exaggerated by market positioning just before the Dubai announcement, pushing dollar/yen and other yen crosses higher in a short squeeze. The euro was up 0.3 percent on the day at $1.4667 and had recovered to stand at 129.95 yen, down 0.2 percent, after falling as far as 129.19 earlier on EBS.
But the dollar's strength against the euro was still intact, however, with speculation that the Federal Reserve would start tightening faster than many had thought. The Fed starts a two-day meet on Tuesday and is likely to keep rates unchanged near zero. All eyes will be on the accompanying statement and if the Fed reiterates a dovish bias and does not fully acknowledge the recent run of strong data, analysts say the dollar index could give up some recent gains.
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