Dollar hovers near one-month low, yen benefits on rising growth risks

The dollar languished close to one-month lows on Friday, seemingly pressured by year-end positioning with financial markets whipsawed by a collapse in oil prices, sell-off in equities and a threat of a U.S. government shutdown.

A day after the Federal Reserve raised policy rates and delivered an outlook that was less dovish than traders had anticipated, the liquidation of heavy long positions in the dollar in markets thinned by holidays seemed to be the only explanation for the dollar’s weakness.

The safe-haven Japanese yen benefited from the brittle sentiment. The dollar index against a basket of six major currencies stood at 96.421 after falling to 96.168 overnight, its lowest since Nov. 20. The index has lost roughly 1 percent this week.

Investors have been on edge all week on rising risks to global growth, with the plunge in oil prices sending a strong disinflationary pulse and extending a slide in U.S. Treasury yields.

That has kept the dollar on the back foot even as the less dovish Fed helped it stave off a potentially bigger sell-off.

The U.S. currency underperformed particularly against the yen as global stock markets sank as investors worried about the Fed’s plans to continue raising rates despite heightening risks to growth.

MSCI’s gauge of global stocks has declined nearly 4 percent this week, touching its lowest since April 2017.

The dollar, which began the week above 113.00 yen, stood at 111.415. It had dropped 1 percent to 110.815 overnight, its weakest since Sept. 6.

The greenback has lost nearly 1.8 percent against its Japanese peer this week, the largest weekly decline since mid-February.

“Dollar/yen buckled as factors which fed risk aversion mounted to extraordinary levels, with the Dow having fallen several hundred points day after day,” said Bart Wakabayashi, Tokyo branch manager at State Street Bank.

“A lot of the moves in dollar/yen has been technically driven in December. There was strong support at 112.00 yen and when that finally gave way, the dollar’s descent gathered pace rapidly. A strong yen, however, does also mean opportunities for Japanese investors to buy foreign assets.”

High currency hedging costs have prompted a move by Japanese investors towards unhedged foreign bonds. Japan’s life insurers have expressed a desire to move purchase unhedged foreign bonds when the yen appreciates.

“We are seeing a classic case of ‘risk off’ lifting the yen against the dollar, something that had not taken place so often in the recent months,” said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo.

The 10-year U.S. Treasury yield was at 2.804 percent after sliding to 2.748 percent overnight, its lowest since early April.

“Whether the dollar can find a floor depends largely on if Treasury yields can pull back from their decline,” said Daisuke Karakama, chief market economist at Mizuho Bank.

“But currently that is not a realistic scenario. It would take an end to the U.S.-China trade conflict or some more U.S. fiscal stimulus for Treasury yields to rebound, neither of which are likely to happen soon.”

Adding to pressure on the dollar was news that U.S. President Donald Trump has refused to sign legislation to fund the U.S. government unless he got money for a border wall, risking a partial federal shutdown on Saturday.

The euro was 0.05 percent higher at $1.1449 after nudging up to a 1-1/2-month peak of $1.1486 the previous day. The single currency was headed for a 1.4 percent gain on the week.

The pound inched was little changed at $1.2660.

Sterling had climbed to a 10-day peak of $1.2707 on Thursday but pulled back from the high after the Bank of England kept interest rates on hold, saying Brexit uncertainty had “intensified considerably” over the last month.

The Australian dollar was flat at $0.7110, after moving away from a near two-month trough of $0.7086 brushed the previous day following tumult in the global markets.