The dollar hit a three-month high against a broadly weaker yen on Tuesday, with the recent correlation between falling stocks and yen strength broken after the exhaustive unwinding of risk-sensitive assets. Outside of strength versus the yen, the dollar fell against a basket of six major currency rivals as US stock futures pointed to a higher Wall Street open - having hit a 12-year closing low on Monday.
The link between the yen gaining as a perceived safety bid when stock markets tumble has been taken over by worries about Japan's sharp economic downturn and a lack of convincing policy steps eroding confidence. "The driving factor behind some of the yen weakness has been domestic developments in Japan...,figures have looked pretty bad and there has also been political turmoil. Taken together this has weighed," said Phyllis Papadavid currency strategist at SG in London.
While some analysts have concluded that unwinding of the yen-financed carry trade is complete, others are not so sure. "It's not unprecedented for the yen to break down in terms of its relationship with stocks. When that happened last year, it held for several weeks, but when it re-established itself it did that with a vengeance," said Adam Cole, global head of FX research at RBC Capital markets in London.
By 1220 GMT, the dollar was up 1.5 percent at 95.86 yen, having earlier hit a three-month high at 95.89 yen, according to Reuters data. The euro climbed to a seven-week high of 122.78 yen. Sterling rose 1.6 percent to 139.20 yen while the Australian dollar gained 2.0 percent to 61.90 yen. Japanese Finance Minister Kaoru Yosano said the government was looking at stock buying and other methods to support the share market..
Euro strength against the yen also helped buoy the single currency versus the dollar. The euro was last up 0.7 percent at $1.2803. Markets shrugged off Germany's Ifo business climate indicator, which fell to 82.6 in February. That was slightly lower than forecasts for it to stay at January's level of 83.0.
The Ifo current conditions indicator worsened to 84.3, also slightly below expectations for 85.0, but the forward looking expectations component improved for a second month. Euro zone industrial new orders fell by 5.2 percent month-on-month in December, in line with forecasts for a 5.0 percent decline.