Yen rises to 7-month highs as US slowdown fears spill over

By Vidya Ranganathan

SINGAPORE (Reuters) -Japan’s yen hit its highest levels against the dollar since January on Monday, as markets extended moves triggered last week after weak U.S. labour data stoked recession worries and expectations of deeper rate cuts by the Federal Reserve.

Friday’s jobs data, coming on top of a string of weak earnings reports from large technology firms and heightened concerns over the Chinese economy, drove a global sell-off in stock markets, oil and high-yielding currencies as investors sought the safety of cash.

The selling continued on Monday, with U.S. Treasury yields falling further, stock indexes in the red, bitcoin dumped and the dollar losing ground mainly to the yen.

High-yielding currencies such as the Indian rupee and Mexican peso tumbled, while currencies that had hitherto been used for funding investments, such as the yen and China’s yuan, rallied strongly.

The carry-funding favourite currency, the yen, traded at 143, up 2.3% versus the dollar and at levels last seen on January 2. It rose as far as 142.20.

The Swiss franc, another popular funding currency, was up more than 1% at 0.8488 to the dollar.

The euro was up 0.2% $1.0937, the dollar index was down 0.4% at 102.72, while the Australian dollar fetched $0.6488 and was down 0.36%.

The market pricing has a 50 basis point rate cut by the Fed at its September meeting, which I think will be too much,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo.

The U.S. economy is showing signs of slowdown, but it’s not as bad as the market is pricing in.

However, near-term momentum could keep the sell-off going, with technical levels also pointing to more yen gains, he said.

Treasury yields have been falling quite sharply since last week, when the Federal Reserve kept the policy rate in its current 5.25% to 5.50% range while Chair Jerome Powell opened the possibility of a rate cut in September.

But by Friday, after data showed the unemployment rate jumped, sparking chatter the U.S. economy could be heading for a recession, expectations for rate cuts deepened.

Yields on 10-year U.S. Treasuries sank nearly 40 basis points last week, the largest weekly fall since March 2020, and were last at 3.75%.

Fed fund futures reflected traders pricing a more than 80% chance of a 50 basis point cut at the central bank’s September meeting, according to CME FedWatch. Futures imply 155 basis points of cuts this year, with a similar amount in 2025.

The yen has jumped 14% against the dollar over the past three weeks, driven in part by the Bank of Japan’s large 15 basis points rate rise last week to 0.25%, alongside which it announced a plan to halve its monthly bond purchases over the next couple of years.

Barclays analysts said the Japanese currency was the most overbought among G10 majors, and therefore “the bar for yet more outperformance in the near term appears high”.

The two-day rout in stock markets late last week saw the tech-heavy Nasdaq Composite notch a 10% correction from a record high hit in early 2022. Equities plunged in Europe and Asia as well, with Japan’s Nikkei index losing 24% over three days, putting it in bear market territory.

The closely watched U.S. two-year-to-10-year yield curve narrowed its inversion. It was the least inverted since July 2022 late last week, reflecting both recession fears and expectations for a sharp easing of short-term yields.

Meanwhile, markets are also dealing with the risk of military escalation in the Middle East after latest developments in the war between Israel and Hamas in Gaza, which has driven oil prices to their lowest since January.

The U.S. military is deploying more forces in the Middle East and Europe following threats from Iran and its allies Hamas and Hezbollah to respond to the killing of Hamas leader Ismail Haniyeh two days ago in Tehran.

(Reporting by Vidya Ranganathan; Editing by Christopher Cushing)