The Japanese yen rose almost one percent against the euro and dollar while sterling fell to new long-term lows on Tuesday as currency markets priced in more signs of economic stress stemming from Britain's vote to leave the European Union. After a shockingly bad reading of construction industry sentiment on Monday, the PMI survey of purchasing managers in Britain's dominant service sector showed only a minimal fall-off in activity last month.
A bigger concern was the suspension of Standard Life's UK property fund and other signs of stress from one of the world's biggest property markets - pumped up in recent years by inflows of foreign capital that analysts worry may now fade. Bank of England Governor Mark Carney only marginally cooled expectations of further aggressive easing of monetary policy to combat the shock to the economy in the months ahead.
One important gauge of markets' appetite for risk and expectations for growth in the longer-run, US 10-year treasury yields, fell to the lowest on record and Carney warned that global aversion to risk might persist for some time. In the currency world, that all tends to drive money into the traditional security of the yen and the Swiss franc. The yen gained 0.8 percent to 101.79 per dollar and 113.53 per euro in morning trade in Europe.
"It's been a rocky start," said Craig Erlam, a strategist with retail broker Oanda in London. "Nothing has necessarily hit the fan as of yet, but there are a growing number of negative reports circulating off the back of the UK's decision to leave the EU and this appears to be starting to weigh on sentiment." Sterling passed the lows hit after last month's vote, sinking to a more than two-and-a-half-year low against the euro, a 31-year low of $1.3112, and its weakest level in broader trade-weighted terms in more than three years.
Dealers say the yen has been capped by persistent Japanese buying of the dollar around or below 102 yen, and there was also speculation that the the Swiss National Bank was holding down the value of the franc. The SNB declined to comment but the franc, in stark contrast to the yen, gained less than 0.1 percent on the day. The euro traded flat against the dollar at $1.1150.
After Carney's appearance, all eyes are on the results of the first round of voting in a Conservative Party leadership election that will eventually produce Britain's next prime minister. "There is no obvious catalyst globally, but we are going to get this concentration of political event risk in the UK," said Kamal Sharma, a currency strategist at bank of America Merrill Lynch in London.
Other currencies that tend to rise when economic times are good, including the Australian and New Zealand dollars, were both down more than half a percent. A private survey indicated that activity in China's services sector rose to an 11-month high in June, but a composite measure of activity fell to a four-month low. Ayako Sera, market economist at Sumitomo Mitsui Trust Bank in Tokyo, said that in Asian trading, "it appears to be the 'risk-off' effect from China that's bringing the dollar/yen to test the 102 level".
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