The safe-haven yen stood tall on Wednesday, having risen broadly as risk appetite waned in the wake of a plunge in German industrial output and after the IMF cut its global economic growth forecasts for a third time this year. The dollar traded at 108.335 yen after sliding to a three-week low of 107.82 yen, further recoiling from a six-year high of 110.09 set a week ago. The euro dipped to its lowest in a month to 136.50 yen before edging back to 136.90.
Data on Tuesday showed German industrial output fell 4.0 percent in August from July, the biggest decline since the height of the financial crisis. At the same time, the IMF nudged its global growth forecast down to 3.3 percent for this year from 3.4 percent, warning of weaker growth in core euro zone countries, Japan and big emerging markets such as Brazil.
Slightly at odds with the IMF, Bank of Japan Governor Haruhiko Kuroda remained upbeat on Tuesday about the economic outlook and shrugged off the need to expand the bank's already massive stimulus program. The disappointing German data, combined with the gloomy IMF forecast, knocked European and US stocks sharply lower. Safe-haven US Treasuries rallied strongly, sending yields sliding again. The 10-year yield fell as far as 2.337 percent, bringing into view a 14-month trough of 2.303 percent set in August.
The USD/JPY pair tends to track US yields quite closely, partly because of the prevalence of carry trades where investors borrow yen at low rates to buy US assets. "Markets looked to be searching for reasons to take back risk off the table as they factor in the reality of some global growth slowdown and still present geo-political risks," said David de Garis, senior economist at National Australia Bank. "They found it in the form of another downside data surprise from Germany with its weaker industrial production report and then a global growth downgrade from the IMF in their latest World Economic Outlook."
Dollar bulls are being forced to temper their enthusiasm for now, particularly as yields have showed no inclination to rise even in the face of last Friday's solid non-farm payrolls report. "The dollar losing a yen a day seems too fast. That said, the dollar's surge from September onwards was overdone. When considering the tightening of two-year yield spread between US and Japanese debt, we should not be surprised to see dollar weaken further versus the yen," said Masafumi Yamamoto, market strategist for Praevidentia Strategy in Tokyo.
The spread between two-year US Treasuries and JGBs stood at 46 basis points after going beyond 50 basis points in late September, its widest since 2011. The dollar index was at 85.873, off a four-year high of 86.746 hit on Friday. Growth concerns in the euro zone and Japan and a lack of global inflationary pressure meant there was no urgency for the Federal Reserve to raise interest rates, even as it winds up its bond-buying stimulus program soon.
Minneapolis Federal Reserve Bank President Narayana Kocherlakota said as much on Tuesday, arguing that low inflation compels the Fed to wait on rate increases, despite the fall in unemployment. The euro was little changed at $1.2630 after pulling further away from a two-year trough near $1.2500 set on Friday. Its Australian peer fetched $0.8774, well off Friday's four-year low of $0.8642. The short squeeze in the Aussie came even after the Reserve Bank of Australia said on Tuesday the level of the currency was still historically high despite its 6.3 percent drop against the greenback in September.
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