The US dollar slumped against the yen today and markets in Hong Kong and Japan plummeted, as risk aversion spread on the back of a slump in equities following the collapse of Lehman Brothers.
Investors in Tokyo had their first chance to fully react to the Lehman debacle on Tuesday as Japanese markets were closed on Monday for a public holiday.
They returned from the long weekend by selling the dollar, pushing the US currency, which has already suffered a sharp decline against the yen on Monday on risk aversion, to a new two-month low versus the yen.
Asian stocks dropped today with markets in Japan and Hong Kong down more than 5 per cent, in response to a tumble on Wall Street that sent the Dow Jones industrial average down 4.4 per cent.
"We are watching Tokyo shares closely after US stocks took such heavy hits in response to Lehman. The yen stands favoured against its major peers such as the dollar under these circumstances," said a dealer at a Japanese securities house.
"The dollar also looks out of favour with talk that the Fed may ease monetary policy later in the day," the dealer said.
There is speculation that the Federal Reserve, which will hold a regular policy meeting today, may cut interest rates again from the current 2.0 per cent by as much as an aggressive 50 basis points.
The dollar slipped 0.2 per cent to 104.45 yen on track towards a four-month low of 103.77 yen hit in July. The euro fell 0.2 per cent to $1.4230 off the near-term peak of $1.4482 struck on Monday. The euro slid 0.4 per cent to 148.48 yen Market watchers said the overall currency market reaction during Asian trading was limited relative to moves in equities and government bonds.
The lead Japanese government bond 10-year futures initially surged three points and triggered a circuit break that forced a halt in trade, in response to Lehman.
"What differs from the Bear Stearns debacle in March, when the dollar was sold off more sharply, is that the United States is no longer the only economy looking bad, and this is limiting the dollar's downside," said Takahide Nagasaki, chief forex strategist at Daiwa Securities SMBC.
Takasaki, however, said the credit crisis was far from over and that the dollar was likely to remain on the defensive in the longer term.
High yielding currencies like the Australian and New Zealand dollars also took heavy hits against the yen.
Reuters