The dollar hit a two-year high against a basket of currencies on Thursday as concerns about a worsening global economy prompted investors to cut risky assets. The yen hit a six-year peak against the euro and a seven-month high versus the dollar as Japanese investors continued to repatriate overseas investments they had made in recent years to make up for low domestic yields.
Deteriorating financial conditions in emerging markets, which have prompted governments such as Hungary to take action to protect their economies, prompted investors to rush to the dollar, the world's most liquid currency, and the safe-haven yen.
"Market players are staggered by the unexpectedly sharp fall in the euro, as well as some emerging currencies," said Tsutomu Soma, senior manager of foreign securities at Okasan Securities. "Selling in European currencies keeps piling up as investors have realised economies in Europe could deteriorate as much as the US economy," Soma said.
The euro slipped 0.3 percent from late US trade to $1.2814 In early Asian trade, the European single currency fell as low as $1.2726, its lowest since November 2006, on trading platform EBS.
The dollar index, which measures the US currency's value against a basket of six currencies, edged up 0.2 percent to 85.631 after hitting a two-year peak of 86.070. The euro slid as low as 123.40 yen its lowest since 2002, before rebounding to 125.14 yen, down 0.3 percent on the day.
The dollar was nearly flat at 97.66 yen after hitting a seven-month low of 96.85 yen on EBS. "We see constant buying of the yen from Japanese institutional investors and asset managers either to hedge or dump their overseas investments," said a senior trader at a Japanese bank.
In late afternoon trade, Tokyo shares recovered from an earlier plunge to a near 5-1/2 year low after a report saying the US is mulling a plan to shore up the troubled housing sector. That helped trim the yen's gains, traders said. Investors were keeping an eye on movements in emerging currencies as they believe that a further slide in them could spark more buying in the yen, traders said.
Some investors are suspected of using the yen to hedge against losses in their assets in emerging countries, said Tohru Sasaki, chief forex strategist at J.P. Morgan Chase Bank in Tokyo. "If that is the case, the yen would automatically get a boost from a slide in emerging currencies," Sasaki said.