The Yen rallied against the Dollar and Euro on Tuesday as investors, fearing tougher credit conditions will crimp global economic growth, bought the lower-yielding currency and sold riskier assets. The Dollar extended its decline after the release of minutes from the Aug. 7 Federal Reserve policy meeting showing the US central bank acknowledging a policy response may be necessary if financial market conditions worsen.
Fed members expected a return to more normal conditions, but recognized the process will likely take some time, particularly in relation to sub-prime mortgages.
"The headline worth highlighting is the one in which they say the Fed may act if financial markets conditions worsen," said analyst.
The UsdJpy traded down 1.4% at 113.98, but was still off its 14-month low 111.60 Yen set in mid-August. The Euro slipped 1.85% against the Yen to 154.74.
Euro slipped 0.44% to 1.3578 from the previous session. UsdChf closed nearly unchanged at 1.2026 and earlier touched a two-week low of 1.1962. The EurChf fell 0.4% to 1.6328.
The Yen was already up prior to the release of the minutes as risk averse investors juggled portfolios.
Overnight, a report from Britain's Times newspaper that State Street Corp has $22 billion in exposure to the same kind of credit-related products that have inflicted other funds damages in recent weeks. State Street said in a statement that its commercial paper continues to be sold daily. British bank Barclays denied a Financial Times report on Tuesday that it has several hundred million dollars of exposure to failed debt vehicles structured by its investment banking arm.
A report showing US home prices fell the most year-on-year in the second quarter to the worst decline in at least 20 years gave dealers a second reason to exit carry trades, in which investors borrow in low-yield currencies like the Yen and invest in higher-yielding assets.
The New Zealand dollar, which has the highest yield in the industrialized world, was down 3.16% to 0.6918 against Dollar. Against the Yen, the kiwi at current prices is flirting with the largest monthly decline since October 1987, down 4.47% to 78.8450. Even if the yen loses some strength, it could still be the largest monthly decline in the kiwi against the yen since October 1998.
Volatility in financial markets has fueled speculation the Federal Reserve may cut its benchmark interest rate, after it reduced the discount rate at which banks borrow directly from the Fed by 50 basis points to 5.75 percent earlier this month. Given such speculation, investors are awaiting a speech on "Housing and Monetary Policy" by Fed Chairman Ben Bernanke on Friday that could offer some indications of the future path of Fed policy. Expectations are fading for the European Central Bank to raise interest rates at its meeting next week.