The yen rose broadly on Wednesday, hitting a two-year high against the New Zealand dollar, as a tumble in high-yielding currencies forced Japanese margin traders making leveraged bets to limit losses by dumping their holdings.
Market players are worried that Japanese day traders, who have built up record bets favouring the Australian and New Zealand dollars on the Tokyo Financial Exchange, are still heavily exposed and may be forced to sell more into any drop. The slide in major currencies against yen pulled the dollar down about 1 yen from the day's highs at one point. Traders said a further decline in Tokyo shares could accelerate dollar selling against the yen, as weak stock prices dent investors' appetite for risk. The Nikkei ended down 2 percent.
The kiwi fell 2 percent at one point to a two-year low near 73.90 yen while the Aussie also fell 2 percent to a four-month low near 93 yen. Falling commodities and expectations that central banks in Australia and New Zealand will cut interest rates to bolster growth have slammed the Aussie and kiwi as the global economy loses steam. The euro has suffered a similar selling.
Oil prices fell to a three-month low of $112.72 this week while gold prices fell to eight-month lows on Tuesday as the dollar's rally triggered a sell-off in metals. The New Zealand dollar fell below $0.6900 to a near one-year low, and the Australian dollar dropped to seven-month lows against the dollar. But the both kiwi and Aussie managed to trim losses as some die-hard Japanese margin traders bought the currencies after the initial sharp falls, traders said.
Data showed Australian wage growth rose more than expected last quarter but remained below levels seen as a threat to inflation and did not alter market expectations for a rate cut as early as September.
The dollar fell 0.3 percent to 108.84 yen after falling as low as 108.35 yen from the day's high of 109.38 yen, and away from a seven-month peak of 110.40 yen hit on the EBS trading platform on Monday. The euro was little changed at $1.4925 off the day's low of $1.4885 and also off a six-month low of $1.4815 hit on Tuesday.
A steep drop in oil and other commodity prices has reinforced the dollar's sharp rebound, while the currency regained strength against the euro on clearer signs that growth is slowing in the euro zone. The euro suffered its biggest one-day drop since January 2001 on Friday.
The dollar index, which measures the US currency against a basket of six major currencies, fell 0.1 percent to 76.042, easing from a six-month high of 76.616 hit this week. Traders were largely sceptical that the dollar would extend its gains, given concerns about the US economy and deepening turmoil in financial markets.