Yen sinks, Aussie climbs as Evergrande contagion fears recede

TOKYO: The safe-haven yen sank to its lowest in nearly three months on Monday, while the risk-sensitive Australian dollar continued to recover from an almost one-month low, as fears of widespread contagion from China Evergrande Group receded.

The yen also fell as higher US yields attracted Japanese investor money, while rising commodity prices helped the Aussie and Norway's crown.

US yields climbed to their highest since the start of July in anticipation of tighter US monetary policy, while the dollar hovered in the middle of its range of the past week versus major peers.

The euro traded little changed at $1.1724, largely ignoring developments in German elections on the weekend, with the Social Democrats projected to narrowly defeat the CDU/CSU conservative bloc.

The Federal Reserve announced on Wednesday that it will likely begin to trim its monthly bond purchases as soon as November and flagged interest rate increases may follow sooner than expected, with half of Federal Open Market Committee members projecting a hike next year.

"USD is likely to remain caught in the cross-currents of a more hawkish FOMC and fading concerns around a potential Evergrande default," Commonwealth Bank of Australia analysts wrote in a client note.

"Nevertheless, the risks are skewed to a firmer USD," with any renewed Evergrande worries unlikely to trigger the level of market volatility of last week, they said.

Concerns that China's second-largest developer Evergrande could default on its $305 billion of debt has overshadowed trade in recent weeks, but some of those contagion fears are receding.

The People's Bank of China injected a net 100 billion yuan ($15.47 billion) into the financial system on Monday, adding to the net 320 billion yuan last week, the most since January.

Several local governments in China have set up special custodian accounts for Evergrande property projects to protect funds earmarked for housing projects from being diverted, media outlet Caixin reported on the weekend.

The yen weakened as far as 110.81 per dollar, matching a low on July 7, before trading little changed at 110.67.

The benchmark 10-year US Treasury yield touched 1.466% for a second day on Monday, the highest since July 2.

"The correlation between US bonds yields and USDJPY has picked up," Chris Weston, head of research at brokerage Pepperstone in Melbourne, wrote in a client note.

"USDJPY looks a little stretched, so I'd be wary to chase here, but I would be looking for a re-test of 110.50 as a potential support zone within what is a progressively bullish trend."

The Aussie climbed 0.37% to $0.7282, up from $0.72205 a week ago, its lowest since Aug. 24.

The Norwegian crown gained about 0.4% and touched 8.5537 per dollar for the first time since July 6.