The yen vaulted against the dollar and the euro on Thursday as a slide in equities prompted investors to take profits on the safe-haven Japanese currency's recent sharp falls. Concerns US monetary stimulus could be scaled back, after testimony on Wednesday by Federal Reserve Chairman Ben Bernanke, and weak Chinese data drove Japan's Nikkei share index down 7.3 percent, its biggest one-day drop in two years.
The yen rose more than 2 percent against the dollar and the euro, which both lost 1 percent against the Swiss franc, also seen as a safe haven. The yen hit a two-week high of 100.83 to the dollar, reversing a slide to a 4-1/2 year low of 103.74 yen on Wednesday after Bernanke told Congress the Fed could "in the next few meetings take a step down" in its bond buying. With the dollar up about 17 percent against the yen this year, analysts said the fall in equities provided the excuse for a profit-taking correction.
"The market got overextended in terms of bullishness on dollar/yen yesterday after the Bernanke comments. We now have seen a correction and some uncertainty in the JGB (Japanese government bond) markets," said Jeremy Stretch head of currency strategy at CIBC World Markets. "The market was somewhat overbought and this prompted a fairly aggressive reaction (in dollar/yen) which was overlayed by a pretty seismic move in equities as well."
Analysts said the dollar could drop further against the yen if equities continued to fall. But they expected the trend of yen weakness and dollar strength to remain given aggressive easing in Japan and the prospect of tighter US policy. "The correction (in dollar/yen) has the potential to go further ... But there is no risk of a dramatic fall and any move below 100 should be brief," said Niels Christensen, currency strategist at Nordea in Copenhagen.
Some traders focused on Bernanke's caveats that the central bank would need to see more improvements in the economy before reducing stimulus, even though Fed minutes showed some policymakers were willing to cut bond buying as early as June. The euro slid to a two-week low of 129.945 yen, having touched a 3 1/2-year peak of 133.82 yen on Wednesday. The single currency was up 0.2 percent at $1.2885, helped slightly by data showing the downturn across euro zone businesses eased slightly this month.
But the PMI business survey numbers pointed to another contraction in the euro zone in the second quarter. Analysts expected the euro to stay weak against the dollar given concerns the Fed will taper its asset-purchase programme while the European Central Bank could ease monetary policy further. A sharp slide in commodity prices hurt the Australian dollar, along with data earlier that showed factory activity shrank in China, Australia's biggest export market. The Aussie last traded up 0.2 percent at $0.9713, recovering from $0.9593, its lowest in nearly a year.