The yen surged on Wednesday, rising to the highest level against the dollar since June 2005, as investors exited riskier assets after soft US retail sales data added to fears the economy could be headed for recession.
Growth worries, reflected in sinking US stocks, prompted some investors to reduce carry trades, in which they borrow in a low-yielding currency such as the yen to h as the Australian dollar. "This is an unwinding of leverage that has been in the market for a while," said Robert Fullem, vice president of foreign exchange corporate sales with Bank of Tokyo-Mitsubishi-UFJ in New York. "There's some concern that this thing might be spreading, and so run for the hills."
The US dollar was down 1.3 percent to 106.77 yen, after dropping as low as 106.61, according to Reuters data. The Australian dollar tumbled 1.9 percent against the greenback to $0.8820, well off the day's high of $0.9018.
Against the yen, the Australian dollar plunged around 3 percent to 94.36 yen.
Concerns that US consumer spending, which makes up around two-thirds of the world's largest economy, is slowing and would spread a slowdown abroad also weighed on other currencies. Sweden's finance minister said forecasts for domestic growth will have to be cut significantly because of problems in the US mortgage market that are dragging on the global economy.
The euro fell 1.7 percent to a four-month low of 157.99 yen. Heavy selling against the yen pushed the euro down 0.4 percent against the US dollar to $1.4800, off the day's high of $1.4922. The dollar was largely unchanged at 1.0927 Swiss francs.
The yen gained ground across the board shortly after the Commerce Department reported US retail sales fell 0.4 percent in December and were the lowest last year since 2002.
A crisis in the US financial sector and widespread housing weakness have been weighing on the rest of the economy and the dollar. It has also boosted currencies such as the Swiss franc and the yen that were previously sold rather indiscriminately because of their low yields. Citigroup Inc, the largest US bank by assets, reported its first quarterly loss since its creation in 1998. "There is a flight to safety with some unwind of carry trades and high yielders getting hurt," said Ron Simpson, director of currency research at Action Economics in Tampa, Florida.
To keep the economy from contracting, financial markets expect the Federal Reserve to cut benchmark overnight interest rates by at least a half percentage point when its monetary policy committee next meets on January 29-30. Lower rates reduce the attractiveness of dollar-denominated securities and demand for the greenback.