Yen soars as investors exit riskier trades

 
The yen rose broadly on Tuesday, edging toward a record high against the dollar, as Japanese companies brought money home and investors closed riskier trades amid fears of a nuclear catastrophe in Japan.
The U.S. dollar fell as low as 80.60 on trading platform EBS, not far from its record low of 79.75 struck in 1995. Traders said a New York daily close below 81.70 would signal a further drop toward the pair's historical low.
Demand for the yen has soared since Japan's devastating earthquake and tsunami on Friday on expectations Japanese insurers and companies will repatriate funds to help pay claims and reconstruction costs.
A sharp sell-off in global equity and commodity prices also prompted investors to buy back the yen as they unwound trades in higher-yielding assets. The low-yielding yen has been a favorite funding currency for these trades in recent years.
"Japanese institutions are believed to be liquidating overseas investments," said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey. "And that forces other people to exit long carry trade positions and long risk positions. It really just becomes a negative feedback loop."
The dollar held steady against the euro and yen after the Federal Reserve maintained its ultra-loose monetary policy.
The U.S. central bank said the economy was gaining traction but flagged potential inflation risks from costlier energy and food.
"The most interesting thing is their saying commodities are putting upward pressure on inflation. They're signaling that they're starting to watch energy prices. If we see oil at levels near $100, it might suggest the Fed raises rates sooner rather than later," said Greg Salvaggio, vice president of trading of Tempus Consulting in Washington.
The dollar last traded at 80.86 yen, down 0.9 percent on the day. Traders noted support around 80.25, the November trough. Strong long-term support stands at the psychologically important 80.00 barrier and the 79.75 historical low.
Japan faced a potential catastrophe on Tuesday after a quake-crippled nuclear power plant exploded and sent low levels of radiation floating toward Tokyo, prompting some people to flee the capital and others to stock up on essential supplies.
The euro lost 0.9 percent to 113.14 yen EURJPY=EBS.The yen rallied particularly strongly against higher-yielding currencies such as the Australian and New Zealand dollars.
The Australian dollar slid to a nine-week low of $0.9815 against the U.S. currency and a four-and-a-half-month low of 79.23 yen, according to Reuters data. Japan is Australia's second-largest export destination and in the short term, a drop in trade receipts will hit Australian growth, UBS said.
Asset managers, hedge funds, corporates and private clients were all net buyers of the yen for the first time since October, UBS said in a note on Monday. "Long yen positions are now considerable, and growing." the bank said.
The traditional safe-haven Swiss franc rose, with the U.S. dollar sliding to a record low around 0.9140 on EBS.
The yen earlier briefly trimmed gains as a 100-basis-point drop versus the dollar spurred vague talk of yen-selling intervention by Japanese authorities. Traders later said there was no intervention, but they were wary Japan may act to stem a sharp yen rise, especially if the dollar were to fall below 80 yen.
"It seems fairly clear right now that neither the BoJ nor the government want to see currency instability and will undoubtedly be prepared to intervene to prevent significant declines in the dollar," said Michael Woolfolk, senior strategist at BNY Mellon in New York. "We think the line in the sand is at 80 yen. If we fall to there, they will come in."