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Yen Rallies as Growth Worries Weaken Risk Appetite

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The Japanese yen rallied across the board on Wednesday as investors grew wary about faltering global expansion and volatile stock markets.

The safe-haven currency strengthened against the US dollar, with the USD/JPY pair falling 0.3 percent to 109.31, after most Asian shares weakened on their first trading day of the new year, with Hong Kong’s Hang Seng index dropping as much as 3.1 percent.

The greenback declined 0.8 percent against the yen to 108.71 earlier in the session, its lowest since June 1. The dollar index slightly rose 0.5 percent to $96.72.

The yen often benefits in times of geopolitical or financial worries as Japan is the world’s largest creditor nation and sees inflows during periods of heightened global market volatility.

The currency has climbed for three consecutive weeks and was among the few gainers last year against a resurgent dollar. The yen has advanced 2.2 percent in the last four days alone.

Chief FX Strategist Kit Juckes stated that if the idea of the US slowdown gathering momentum and the Federal Reserve cutting rates is embraced, then the yen is the right currency.

As the outlook for more US rate hikes have gradually faded in markets in recent weeks, financial markets now expect no rate increases this year and traders are keeping an eye on the greenback’s weaknesses.

The yen is cheap on most metrics, it is not currently undermined by a weakening Chinese yuan and it is not dependent on economic or policy surprises in Japan, according to Juckes.

Juckes said the correlation between the yen and US interest rates had returned after being mostly non-existent in early 2018.

Volatile equity markets have also added to the safe-haven demand of the yen. A largely followed indicator of expected near-term volatility for US stocks has almost doubled to 28 from 16 at the beginning of December.

The yen still has room for further gains if hedge funds decide to loosen big short positions on the currency which, according to positioning data, is near 5-year highs.

Meanwhile, disappointing manufacturing data from Spain, France, Italy, and Germany pushed the euro down by 0.8 percent to 1.1367 against the dollar.

Traders see the single currency to remain strained by both growth and inflation in the eurozone, which are still below the European Central Bank’s (ECB) expectations.

Fears of a global economic slowdown intensified on Wednesday after a private sector survey showed China’s purchasing managers’ index (PMI) contracted for the first time in 19 months in December as domestic and export orders continued to stumble.

While the dollar has been somewhat steady going into the end of 2018, waning equity boom, weakening cash repatriation by US companies, and the possibility that the Federal Reserve will not hike rate as many times as it previously suggested now pose pressures for the greenback.

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