A risk-off mood bolstered the safe-haven yen on Thursday, with record lows on U.S 30-year Treasury yields holding back the dollar as investors turned bleak on the prospect of a trade war breakthrough any time soon.
The yen firmed 0.3 percent by lunchtime in Asian trade to as high as 105.91 per dollar, after the cautious optimism seen in currency markets in the morning gave way to gloom.
The Japanese currency also gained against the Australian dollar and New Zealand dollar, which hit a four-year low as business sentiment weakened.
The sterling was flat, nursing losses incurred on Wednesday when fears of a no-deal Brexit surged in response to British Prime Minister Boris Johnson’s move to suspend parliament in a bid to limit debate ahead of the October 31 Brexit deadline.
“It’s very difficult to take on any kind of major risk in this environment,” said Chris Weston, head of research at foreign exchange brokerage Pepperstone Group, pointing to the inverted yield curve as an indicator of sentiment.
“We’ve got a pretty clear idea of what our two big circuit breakers are — those being a genuine feel towards the Xi-Trump relations and the other one is the Fed getting ahead of the curve,” he said on the phone from Melbourne.
“We just don’t think any of those are going to be triggered any time soon…we’ve just been advocating just staying in those core, defensive FX positions for the moment.”
China’s onshore spot yuan eased slightly, to be weaker for an 11th straight session, although a firmer-than-expected central bank fixing helped stem deeper losses. Against a basket of currencies the dollar was steady around 98.190.
Dominating investor concerns is the inverted U.S. Treasury yield curve, in which long-dated yields are lower that short-dated ones, commonly considered a sign of future recession.
Sentiment in the currency market is also likely to be weighed by the Sino-U.S. trade dispute, which remains far from unresolved.
The latest round of tit-for-tat trade-war tariff hikes takes effect on Sunday, with Washington set to levy an extra 5 percent tariff — announced by President Donald Trump on Twitter last week — on $300 billion in Chinese imports.
Retailers across the U.S. warned on Wednesday of price hikes and braced for job losses as a result, while on Thursday Korea outlined its most aggressive spending plan in a decade to buttress its weakening economy.
Yields on 30-year Treasuries and 10-year German bunds both hit a record low as investors scrambled for the safety of government debt.
“The biggest market impact of these new threats is the uncertainty,” Hannah Anderson, Global Market Strategist at J.P. Morgan Asset Management said by email.
“This uncertainty is having the most damaging effect on markets; it constrains investment, slows growth, elevates volatility, and darkens the outlook for investors of all stripes.”
The latest gloomy omen came from New Zealand, where ANZ Bank’s closely-watched survey of business sentiment showed deepening weakness in both activity and confidence. That suggests aggressive cuts in interest rates are yet to gain any traction.
The kiwi was off 0.3% at $0.6318, after touching its lowest since September 2015 at $0.6311.
The pound held steady at $1.2202 on Thursday and was last quoted at 90.82 pence per euro.
The Chinese yuan was close to lows not seen since the global financial crisis, trading onshore at 7.1663 per dollar and offshore a little weaker at 7.1728 per dollar at 0400 GMT.
The yen hit a session high of 105.91 by 0402 GMT. Spot gold rose 0.2 percent to $1,542.00 per ounce, after hitting a six-year high on Monday.
The yen and gold are both considered safe-haven assets.