The low-yielding yen rallied on Thursday as renewed fears about tightening credit conditions choking broader economic activity roiled financial markets and spooked investors into slashing exposure to riskier assets.
The yen rose to 2-1/2 month peaks against the dollar and a one month high against the euro, and strengthened 1 percent against sterling and the New Zealand dollar, high-yielding currencies that had acted as popular targets for carry trades.
Analysts said the yen rally was sparked by sharp falls in US stock futures, European stocks, emerging markets and a rally in top-rated government bonds as due to worries over possible contagion in credit markets from previously self-contained troubles in the US subprime, or risky, mortgage sector. The euro was also dragged to a 2-week low against the dollar on the back of the yen's sharp moves.
"US equity futures started dropping like a stone and everything else seems consistent with that - high-yielding currencies are getting hit and low yielders are bouncing with risk appetite as the issue at the bottom of it," RBC Capital Markets senior currency strategist Adam Cole said.
"The market has started to see the risk of contagion growing. There's been a general assumption that the subprime issue was ring-fenced and that's been questionable in the past few days," he added.
By 1153 GMT, the euro was down 0.6 percent at 164.37 yen, having hit a one-month low of 163.97 earlier. The dollar hit a 2-1/2 month trough of 119.64. Sterling was down 0.9 percent at 245.17 yen, while the New Zealand dollar lost 1.3 percent to 95.27.
The euro was down 0.1 percent at $1.3706 and fell 0.2 percent to 1.6610 francs. The single currency had fallen more than 0.75 percent on Wednesday, posting its biggest daily fall in percentage terms since January and retreating sharply from Tuesday's record high at $1.3852, according to Reuters data.
The single currency shrugged off a slight fall in the German Ifo business climate index in July which did little to change expectations for a further euro zone rate hike in coming months.
The dollar was holding firm against a basket of currencies, flat on the day at 80.64, recovering from a 15-year low of 80.01 touched on Tuesday and keeping above the psychologically crucial 80.00 level.
US S&P 500 futures were down 16.70 points, below fair value, a mathematical formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures were down 118 points, and Nasdaq 100 futures were off 16.25 points, while Europe's FTSEurofirst 300 index of top European shares was down 1.5 percent at 1,548.24 points. With the spotlight on subprime mortgages, investors are paying particular attention to news on the US housing market.
Figures on Wednesday showed that the pace of US existing home sales in June fell to a 4-1/2-year low. New home sales due at 1400 GMT are expected to slide from the previous month. "If we get further evidence of capitulation of non-subprime mortgage market in the US that would potentially see another leg of dollar weakness," Rabobank strategist Jeremy Stretch said.