The yen rose against major currencies on Monday after poor economic data in the United States and the euro zone heightened investor concerns about a prolonged economic recession. Worries about the faltering global economy also weighed on higher-yielding currencies such as the Australian dollar and the New Zealand dollar, which hit its lowest in eight years against the yen as investors remained risk averse.
The euro fell to its weakest in two months against the dollar as worsening labour market data and receding inflation made some reassess the outlook for interest rate cuts in the euro zone. "Changing rate expectations is one factor behind the euro's weakness," said Tomoko Fujii, head of Japan economics and strategy at Bank of America.
"The data are all telling us that aggressive rate cuts are probably needed in the next several months - although not necessarily this week." Except against the yen, the dollar firmed, although investors were cautious about pushing it higher as they awaited progress on US plans to clean up debt and recapitalise banks.
As early as this week, US President Barack Obama and his economic advisers may begin to flesh out such plans and could lay out a range of options, including setting up a so-called "bad bank" that would buy assets from banks and offering guarantees that would cap losses at a certain threshold.
"If a bad bank is set up, it would be fresh, positive news and lift US stocks. That would likely ease risk aversion to some extent," said Yuichiro Nakamura, FX dealer at Shinkin Central Bank. The dollar was at 89.67 yen, slipping 0.3 percent from late US trade on Friday, when data showed the US economy shrank 3.8 percent in the fourth quarter, its fastest pace in nearly 27 years.
The euro fell 0.7 percent to $1.2728 after dipping as low as $1.2710 on trading platform EBS, the lowest since early December as anxiety about Europe's slumping economy weighed. Against the Japanese currency, the euro declined 1 percent to 114.17 yen.
The European Central Bank is expected to keep rates on hold at 2 percent when it meets on Thursday but take action in March as both growth and inflation slide to new lows, a Reuters poll showed. The Aussie fell to a two-month low as weak Australian housing data reinforced expectations of a bold interest rate cut on Tuesday.
Analysts expect the Reserve Bank of Australia to cut its key cash rate by 100 basis points to 3.25 percent, the lowest since the central bank began to target it in the early 1990s, a Reuters poll showed. The Australian dollar fell 0.7 percent to $0.6327, after hitting $0.6305, its lowest since early December, according to Reuters data.
The New Zealand dollar fell 1 percent to $0.5037 after hitting $0.5017, its latest six-year low, Reuters data showed. It dropped 1.5 percent to 45.00 yen, its weakest since November 2000. New Zealand wage growth eased from record levels in the fourth quarter, data showed on Monday, leaving the way open for more interest rate cuts.