The yen rose two percent against the euro on Monday and extended a rally to a three-month high versus the dollar as edgy investors unloaded risky carry trades in the face of tumbling stock markets.
Yen strength against major currencies, which saw it register its biggest weekly percentage gain versus sterling since November 1999 last week, has fuelled market volatility and investor anxiety as they rush to cut their exposure to risk.
Falling stocks, along with concern about the US economy, are prompting nervous investors to liquidate carry trades where they sold the low-yielding yen to buy higher-return assets. "We have the stock market falls and those are largely a function of a cyclical shakeout. Risk aversion is increasing. Ultimately this is the yen move and the yen has been subject to undervaluation due to the phenomenon of carry trades," said Adrian Hughes, currency strategist at Societe Generale.
"The risk is that we see a much stronger yen if US data this week stays much weaker than expected." By 1245 GMT the euro had fallen as low as 151.09 yen, its lowest since late November and down 1.9 percent on the day. The euro saw its biggest weekly percentage loss against the yen last week since August 2003, having hit a record high near 160 in February.
The dollar hit a three-month trough of 115.16 yen, before coming back to 115.43, down 1.16 percent on the day. Carry trades had pushed the yen to a 21-year low in January on a real, inflation-adjusted traded weighted basis.
The single currency's losses against the yen dragged it down 0.8 percent to $1.3086. The euro was unmoved by below-consensus eurozone service sector data. Sterling took the biggest hit from carry unwinding, dropping more than 2 percent at one point to 221.51 yen - last seen in mid-October. The pound had been one of the biggest beneficiaries of the carry trade financed by the yen or Swiss franc.