Yen set for biggest rally in a month as investors seek safe havens

[LONDON] The yen headed for its strongest daily rally in a month on Thursday (Oct 22), drawing safe-haven flows from investors fretting over fragile equity markets, high crude prices, war in the Middle East and potential disappointment in future returns from artificial intelligence.

The US dollar often serves as the market’s safe haven of choice when sentiment takes a knock, but with US Treasury yields also falling due to capital flows into bonds, and investors unwinding some of their bets on future US rate rises, the greenback lost out to the likes of the yen and the Swiss franc.

The yen, which has spent much of October in a tight range, strengthened sharply, leaving the dollar down 0.9 per cent at 156.8, set for its largest drop since late September. The yen pushed higher against the euro, pound and Australian dollar.

“AI is making people nervous, as is oil... and as is France, and obviously we have a slight degree of risk aversion in the market, which is benefiting Treasuries, marginally benefiting gilts, and obviously did so for (Japanese government bonds) overnight,” Chris Scicluna, head of economic research at Daiwa Capital Markets, said of the move lower in government bond yields in the US, UK and Japan.

“Expectations with regard to the Bank of Japan’s (BOJ) policy outlook are coalescing, and some of the upside risks that were there in terms of Japanese monetary policy probably diminished, in part because of concerns about the AI build-out, and France as well. Clearly, the yen has made a move to strengthen this morning,” he added.

The BOJ is expected to leave rates unchanged at 1.25 per cent at its meeting on Oct 29 to 30, and markets show traders expect a steady series of increases that would bring borrowing rates to around 2 per cent by the end of 2027.

The Swiss franc enjoyed a boost, leaving the dollar down 0.4 per cent at 0.8215 francs and down 0.7 per cent against the euro at 0.9199 francs. Worries about France’s ability to tackle its huge debt burden have hurt French government bonds and raised concern about other heavily indebted eurozone countries, which has, in turn, weighed on the euro.

The euro, which had held steady most of the European day, was last down 0.25 per cent at US$1.1206 against the dollar, but down just 0.1 per cent against the pound at £0.8382.

French 10-year yields are trading around their highest since 2002, as weekend unrest in France, fuelled partly by cuts to public services, has highlighted how politically difficult it will be to bring budgetary deficits under control.

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The European Central Bank is expected to hold its benchmark rate at 2.5 per cent at its meeting on Oct 28 to 29, though a hike is all but priced in before the year’s end.

Investors hold a near-record bullish position in the dollar, going by London Stock Exchange Group data, on the assumption the AI boom keeps the US economy humming, and strong growth supports US interest rates staying higher for longer.

Recent wobbles in AI-related debts and stocks have knocked that confidence a little bit and unsettled the dollar, which has fallen for two weeks in a row against a basket of currencies.

Sterling, which hit a one-month high of US$1.3409 earlier in the week, has been supported by hotter-than-expected British inflation, but dipped to US$1.3365.

The Federal Reserve is anticipated to keep rates on hold in October, with the Fed funds rate window at 3.75 to 4 per cent, but hike in December. REUTERS