Yen Reaches 2-Month High on China, Saudi Tension as Dollar Rises

  • Stocks slide amid risk aversion after Shiite cleric executed
  • Chinese factory slowdown weighs on Aussie, kiwi dollars

The yen and dollar climbed as traders sought to buy refuge assets after Chinese stocks plunged and tensions escalated between Saudi Arabia and Iran.

The New Zealand dollar led losses among major currencies while the Brazilian real and Australian dollar also dropped with stocks after China’s purchasing manager’s index, a manufacturing gauge, unexpectedly slumped in December to a three-month low. The yen and greenback advanced after Saudi Arabia cut diplomatic ties with Iran, a day after its embassy in Tehran was attacked to protest the execution of a prominent Shiite cleric.

"The yen is definitely a haven trade after the decline in Chinese equities and the dollar’s getting a benefit from some flight to quality," said Shaun Osborne, chief foreign-exchange strategist in Toronto at Bank of Nova Scotia.

The yen strengthened 0.9 percent to 119.44 per dollar at 5 p.m. New York time. It touched 118.70, the strongest level since Oct. 15. Japan’s currency gained 1.3 percent to 129.37 per euro. The dollar added 0.2 percent to $1.0831 per euro.

The moves largely mark an extension of December’s price actions, which saw the yen outperform the dollar for the first time in three months while the euro posted its biggest monthly gain since April amid concern about the pace of the global economic recovery.

“Foreign-exchange markets are in the limelight, not only driven by increasing tensions between Saudi Arabia and Iran mounting this morning with Saudi Arabia cutting its diplomatic ties to Iran, but also by the release of weak global data reminding us that demand deficiency and overcapacity will remain top themes for 2016,” Morgan Stanley strategists led by London-based Hans Redeker wrote in an e-mailed note.

Funding currencies including the yen, dollar, euro and Swiss franc should benefit while those of nations that produce commodities other than oil, such as Turkey’s lira and South Africa’s rand as well as the Aussie and kiwi, will weaken, the analysts wrote.

Aussie Slump

Australia’s dollar slid 1.5 percent to 71.91 U.S. cents, while New Zealand’s kiwi was also 1.9 percent weaker at 67.52 cents. Brazil’s real slid 2 percent.

The rising tensions between Saudi Arabia and Iran marked the biggest deterioration in relations between the two Middle Eastern power brokers in almost three decades. The clash risks undermining already-stumbling efforts to end the war in Syria, where Saudi Arabia backs largely Sunni militants and Iran supports the regime of President Bashar al-Assad.

"Dollar-yen is just taking a cue from the broad risk-off market move," said Alvise Marino, a foreign-exchange strategist at Credit Suisse Group AG in New York. "It’s a pretty rough set of news to wake up to. That doesn’t make for the kind of environment that makes people want to buy risky assets."

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