The yen hit a six-month high against the dollar on Monday, gaining for a sixth consecutive session against the greenback as stock markets tumbled and pushed investors to the perceived safety of the Japanese currency.
Wall Street closed lower on Friday, and both Asian and European stock markets fell on Monday as the threat of new lockdowns amid rising cases of the COVID-19 disease made investors anxious about the global recovery.
U.S. stock futures indicated further losses on Wall Street on Monday.
The selloff had a tone similar to a drawdown in March, with stock markets led lower by banks and travel shares, the euro falling, the dollar gaining broadly, and government bond yields falling.
In early deals in London, the yen hit 104.065 against the dollar, gaining as much as half a percent. That was its highest level since March 12.
"An unrelenting rise in coronavirus cases globally is weighing on sentiment at the start of the trading week as investors increasingly question their rosy predictions about the recovery," said Raffi Boyadjian, senior investment analyst at online broker XM.
The dollar - subdued during Asian hours - perked up in London trade as European stocks sank to two-week lows and U.S. stock futures fell.
The index that measures the greenback against a basket of peer currencies was up 0.3% at 93.267 by midday in London.
Marshall Gittler, head of research at BDSwiss, said the yen's rise was part of a typical "risk-off" move in FX markets with the exception of the Swiss franc, which turned weaker.
“With the pickup in foreign bond yields for Japanese investors getting less and less, capital flows out of Japan may fall even further,” he said.
“Meanwhile, with Warren Buffet buying Japanese stocks and a new administration coming in with a focus on economic and regulatory reform, foreign purchases of Japanese stocks may pick up.”
The result could be a stronger yen regardless of risk sentiment, Gittler said.
In its past six sessions, the yen has gained 2% against the dollar.
Key for the U.S. currency’s direction this week will be a slew of Federal Reserve speakers, who may shed light on the U.S. central bank’s new approach to inflation.
Fed Chairman Jerome Powell is due to appear before Congressional committees, while Fed committee members Lael Brainard, Charles Evans, Raphael Bostic, James Bullard, Mary Daly and John Williams are also making public speeches.
The euro traded 0.5% lower to the dollar, falling as low as $1.1776 at one point. Sterling also fell 0.5% to trade at $1.2849 as the dollar caught a bid.
“To see euro/dollar break to the upside, FOMC (Federal Open Markets Committee) members would need to flip communication in a dovish direction and signal more support while PMIs should surprise on the upside,” said Christin Tuxen, Head of FX Research at Danske Bank.
Tuxen said the bank’s main scenario was a broadly unchanged spot rate in the euro/dollar pair by week end.
In Asia, the Chinese yuan hovered just below a 16-month high.
Foreigners’ Chinese bond buying has helped put the yuan on a tear, lifting it nearly 6.5% in four months.
Investors are expecting FTSE Russell will include China in its World Government Bond Index on Thursday, likely triggering even more inflows and supporting the currency.
The Taiwan dollar jumped 0.7% to a seven-year high of 28.935 per dollar, a move analysts said might be due to a combination of equity inflows and authorities seeking to project calm amid heightened cross-straits tensions.
Reporting by Ritvik Carvalho; additional reporting by Tom Westbrook in Singapore; Editing by Angus MacSwan and Alison Williams