Yen falls across the board

05 Aug, 2004

The yen fell across the board on Wednesday as record high oil prices dimmed Japan's recovery outlook and soured investors' recent enthusiasm for Asian stock markets.
The euro, meanwhile, teetered above recent six-week lows against the dollar as news of a rise in German unemployment reinforced concerns over the sustainability of the region's export-led recovery.
The yen suffered the same fortunes as Tokyo's benchmark stock index, which tumbled to its lowest in over two months as US light crude touched $44.28 a barrel - the highest price since oil futures were launched on the New York Mercantile Exchange in 1983.
"High oil prices squeeze the yen from both sides," said Trevor Dinmore, foreign exchange strategist at Deutsche Bank. "Not only does Japan get a cost shock, because it imports all its oil, but the yen is a very equity flow-dependent currency."
Surging oil prices and the prospect of higher interest rates have made investors nervous about the sustainability of the global economic upturn, encouraging a flight out of equities and into safe-haven bonds.
The dollar was up three-quarters of a percent at 111.50 yen at 1145 GMT, slightly outperforming the euro which was up half a percent at 133.96 yen.
The euro stood at $1.2012, bobbing just above six-week lows below $1.1990 hit last week.
Tokyo's Nikkei share average closed 1.17 percent down on the day after plunging 2 percent at one point in the session to its lowest reading since late May.
European shares also struggled but analysts noted that most investors moving out of eurozone equities simply switched into eurozone government bonds, meaning the currency impact was limited.
Japan's zero interest rate policy, however, means the yields on Japanese government bonds (JGBs) are unpalatable to most overseas fund managers.
"Investors in euroland and the United States simply substitute stocks for bonds," said Kamal Sharma, currency strategist at Dresdner Kleinwort Wasserstein. "But returns on JGBs are so low, when foreign investors pull out of Japanese shares they tend to pull out of Japan altogether." Futures markets were pointing to a second day of declines on Wall Street, with investors awaiting data on factory orders and the dominant services sector later.

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