Dollar and yen get boost from Japan worries

Published March 15, 2011 10:46 am
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New York • Investors worried over the nuclear crisis in Japan and the ensuing worldwide sell-off in stock markets are buying up the globe's traditional safe-haven currencies: the dollar, Swiss franc and even the Japanese yen.

The flight to safety comes as Japan's benchmark Nikkei 225 sank 10.6 percent — more than 1,000 points — on Tuesday, on top of a 6 percent drop Monday. Stocks tumbled in Europe and opened sharply lower in the U.S., with the Dow Jones industrial average off by more than 260 points, or 2.2 percent.

The move to buy yen may seem counter-intuitive considering the devastation wrought by the earthquake and tsunami in Japan, and the intensifying nuclear threat. But investors expect Japanese investors to close down overseas bets and bring their money home.

"Japanese investors' proclivity towards liquidating overseas assets in the face of risk aversion is well-known," said a group of UBS currency analysts in a research note.

Demand for the yen may keep up as Japan seeks to fund the country's restructuring. After another huge earthquake in Japan, in 1995, the yen gained about 20 percent against the dollar in three months.

Continued strength in the yen — the currency has risen about 14 percent against the dollar in the past 12 months — could weigh further on Japan's economy. A stronger yen cuts into the profits of Japan's big exporting corporations.

In morning trading in New York, the dollar fell to 80.85 Japanese yen from 81.65 yen late Monday — in striking distance of the post-World War II low of 79.75 yen hit in 1995.

The yen is gaining despite another liquidity injection from the Bank of Japan Tuesday. The central bank pumped 8 trillion yen ($98 billion) into financial markets a day after it fed a record 15 trillion yen into money markets and eased monetary policy. The Japanese government and central bank intervened to weaken the yen last year, and may do so again if the yen trades "become too disorderly," said HSBC currency strategist David Bloom.

The yen is also rising against the world's other major currencies, as is the Swiss franc. The yen is considered a safe haven because Japan is the world's No. 3 economy, has a large trade surplus and Japanese investors hold most of the Asian country's debt, so capital isn't likely to rush out of the country. Switzerland has also benefited from its relatively low debt levels compared to many of the euro bloc's members.

The dollar hit a record low of 0.9168 Swiss franc Tuesday, trading up to 0.9179 by mid-morning. On Monday, the dollar was worth 0.9242 Swiss franc.

The U.S. currency is significantly higher against the euro, pound and other currencies around the world. The euro fell to $1.3922 from $1.3995, the British pound dropped to $1.6037 from $1.6174 and the dollar gained to 98.84 Canadian cents from 97.45 Canadian cents. The dollar leapt against the Scandinavian currencies and the Australian and New Zealand dollars, and rose against emerging-market currencies in Latin America, Eastern Europe and Asia.

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