The Japanese yen clung to its recent gains on Wednesday as worries about a global economic downturn grew, while sterling slumped on British Prime Minister Boris Johnson's move to limit parliament's opportunity to derail his Brexit plans. Two-year US government bond yields rose further above 10-year yields, a deepening of the inversion of the yield curve that many see as a harbinger of a recession. Investors are worried that the trade conflict between the United States and China could tip the world into an economic slowdown.
The yen stood at 105.78 per dollar, unchanged on the day but close to the 7-month high of 104.46 hit on Monday. "Much if not all of the decline in dollar/yen is simply down to markets becoming more risk averse," said Adam Cole, currency strategist at RBC Capital Markets.
Cole said, however, that if the outlook for the global trade conflict improves and risk appetite recovers, he expected the dollar to "grind higher" against the yen as Japanese investors continue to buy higher-yielding dollar assets without hedging the currency risk, which would support the greenback. The dollar index, which measures the US currency against a basket of currencies, rose marginally to 98.091.
Sterling skidded more than 1% against the euro and dollar on media reports of Boris Johnson's plans. A government source said the prime minister, who has vowed to take Britain out of the EU without a divorce deal if necessary, would set an Oct. 14 date for the Queen's Speech - the formal state opening of a new session of parliament.
Sterling was last down 0.6% at $1.2209 and 0.7% lower versus the euro at 90.87 pence, just off the day's lows. Elsewhere, weaker risk appetite weighed on the Australian and New Zealand dollars, which tend to perform well when investors buy into riskier assets. The Aussie has been on the back foot since Reserve Bank of Australia (RBA) Deputy Governor Guy Debelle said on Tuesday that a weakening of the currency was supporting the economy and that further falls would be beneficial.
The Aussie had fallen to a more than decade-low of $0.6677 early in August. On Wednesday it stood at $0.6724, down 0.1% on the day while the kiwi was 0.3% lower at $0.6341. The Chinese yuan edged lower to 7.1703 in offshore markets, not far from the record low of 7.187 it touched on Monday. Euro/dollar was flat at $1.1094 with little in the way of new economic data scheduled for Wednesday or developments to spark bigger moves.
Analysts at ING said positive news in Italy, where the 5-Star Movement and the opposition Democratic Party appear on the verge of agreeing a governing coalition, would not help the euro significantly. "Instead the escalation in trade wars merely looks to extend the slowdown in manufacturing, depressing European growth still further," they said.
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