The yen climbed on Monday and struck a one-month high against the euro as a grim global outlook favoured safe-haven currencies and stirred expectations of an aggressive euro zone rate cut later in the week. Stocks in Asia retreated after Friday's dismal US payrolls report showed 1.1 million jobs lost since November, full-year job losses reaching the highest since 1945 and the unemployment rate reaching a 16-year high.
The jobs figures were added to the torrent of woeful economic data from around the globe that has smothered a budding revival of risk appetite since the start of the year. The euro slid as investors believe the European Central Bank will turn more aggressive about slashing interest rates after having been more measured in its reductions compared with other central banks, especially the Federal Reserve. The ECB meets on Thursday, and investors are divided about the size of a cut from the current 2.5 percent. Money markets are pricing in a chop of as much as 75 basis points, helping drive two-year euro zone bond yields to record lows.
Currency strategists at Calyon said they are expecting a more modest quarter-point cut, but even a smaller-than-expected move would be a negative for the euro "as the market punishes the ECB for its lack of action." Calyon noted that interest rate shifts have been having less influence on currencies lately, meaning a smaller easing of policy could still spark solid euro selling.
Trading was limited with Japanese financial markets closed for a holiday. The euro shed 0.5 percent against both the dollar and yen to $1.3410 and 120.90 yen, with the single currency hitting a one-month low near 120.45 in early trade. The dollar was little changed at 90.10 yen.
The Australian dollar slid as some market players put on short positions, betting on dismal trade figures in China and a bad jobs report in Australia this week. The Aussie shed 1.2 percent to $0.6938 and hit a session low of $0.6895, also coming under pressure from the drop in gold and commodity prices. Stop-loss orders were also triggered near $0.6970, traders said. The yen was the standout winner as speculators unwound some carry trades put on at the start of the year as risk appetite improved and stocks rallied. The yen tends to benefit as a safe-haven currency when carry trades are unwound.
Dealers reported aggressive selling of euro for yen on Friday, with one Japanese bank dumping particularly large amounts from 125.00 all the way down to 121.26. The euro failed to capitalise after the US jobs report confirmed the economy's deep contraction and provided little hope of a near-term end to the heavy layoffs.
Speculation is rife the ECB will cut rates after alarming falls in industrial output across the euro zone, marking a sharp turnaround in sentiment after the central bank had seemed to be talking down the chance of a cut this month.
"We now expect the ECB to deliver more stimulus than we did a month ago," Royal Bank of Canada assistant chief economist Dawn Desjardins wrote in a note to clients. The Federal Reserve has slashed rates to near zero and cannot cut any further, instead boosting the money supply by buying private assets on its balance sheet. Fed Chairman Ben Bernanke speaks on the central bank's response to the crisis on Tuesday.
Economic news this week includes the November trade account, retail sales and consumer prices for December. Also of interest on Friday will be Treasury data on capital flows in and out of the United States since the country needs to borrow a vast amount of money this year. Any hint of waning foreign demand for US debt could undermine the dollar.