The dollar tumbled to a four-month low against the yen while the New Zealand dollar fell sharply versus the Japanese currency on Monday as worries about a credit crunch prompted an unwinding of risky carry trades.
The dollar fell to 117.19 yen on electronic trading platform EBS, its lowest level since late March, due partly to stop-loss position unwinding by Japanese retail investors. The dollar extended its losses following a fall in US share prices on Friday after Bear Stearns said credit markets were in their worst shape in two decades.
"Due to the credit-related issues there are still some moves toward risk reduction," said Tomoko Fujii, head of economics and strategy for Bank of America in Tokyo. "There is probably some sporadic unwinding of carry trades," Fujii said.
The dollar pared some of its losses to stand at 117.60 yen, down about 0.35 percent from late US trading on Friday. The high-yielding New Zealand dollar fell about 0.60 percent to 89.18 yen. US stocks fell sharply on Friday, with the Standard & Poor's 500 Index and the Nasdaq Composite Index both losing more than 2.5 percent.
Data showing the slowest rate of US job growth since February added to the dollar's woes on Friday. The dollar extended its losses against the Swiss franc, falling as low as 1.1817 Swiss francs, the lowest since April 2005, according to Reuters data.
The euro rose around 0.30 percent to $1.3816. It rose as high as $1.3840 on EBS earlier this session, nearing a record high of $1.3853 hit in late July. Further falls in global equity markets could cause more risk aversion among investors and trigger more unwinding of yen carry trades, which involve selling the low-yielding yen to buy higher-yielding currencies and assets, traders said.
Concerns about a decline in investor risk appetite, however, were tempered somewhat by a 1.2 percent rise in China's benchmark stock index. Traders said the yen's rise on Monday was partly caused by stop-loss position unwinding by Japanese retail investors, who had placed bets against the low-yielding yen using leveraged margin trading.
Adverse market moves late in US trading hours tend to prompt position unwinding by Japanese retail investors in Asia early in the next trading session, market players said.
"It's similar to what happened last week," said Katsuya Suzukawa, chief dealer for FXCM Japan, a major margin broker, referring to position unwinding by Japanese retail investors. "There are people who put in stop-loss orders by themselves while others are hit with margin calls," Suzukawa said.
He added, however, that Japanese retail margin traders still seem to be interested in buying currencies such as the dollar, sterling, and the New Zealand and Australian dollars on dips.
The Federal Reserve is widely expected to hold interest rates steady at 5.25 percent at a policy meeting on Tuesday. Despite the tumult in credit markets, the Fed will probably reiterate in its post-meeting statement that inflation risks are the main worry, analysts said.