Future Business

The yen rallied broadly on Friday as European stock losses dulled investor appetite for risky assets, while the euro slid across the board after data showed the euro zone economy shrank at its fastest pace on record.

The euro’s losses on the fastest ever contraction in the euro zone economy were greatest against the yen, which helped spur the Japanese currency to a two-month high against the dollar.

The 16-nation euro zone economy shrank 2.5 percent in the first quarter from the previous quarter and 4.6 percent from the same period a year ago, driven by a plunge in German output. [ID:nLF21360]

This hurt the euro and fed into broader stock market selling, with European stocks down 0.5 percent .FTEU3, UK stocks down 1 percent .FTSE and U.S. stock futures pointing to opening losses of up to 0.8 percent.

Investors sought currencies perceived to be safer assets like the yen, which speculators still regard as the funding currency of choice when risk appetite is high.

"The story isn’t as much that the (euro zone) data was weak, but how weak. It was a massive surprise just how weak the data was … and that was the main trigger for the euro to go lower," said Paul Mackel, senior currency strategist at HSBC in London.

"And the yen is trading well, and seems to have some momentum but that’s largely a function of euro/yen."

At 1200 GMT euro was down 1.6 percent against the yen at 128.60 yen <EURJPY=R>, having hit a two-week low around 128.41 yen earlier.

 The euro also shed 0.8 percent against the dollar to trade at $1.3530 <EUR=>, near the lows for the week.

The dollar was down 0.9 percent against the yen at 95.05 yen <JPY=>, having hit a two-month low of 94.78 yen on trading platform EBS. A close below the 100-day moving average of 95.14 yen will be the first for three months, Reuters charts show.

The euro was well on track for its biggest weekly loss against the yen since late January and the dollar/yen on track for its steepest weekly decline since its collapse in late October.

The Australian dollar fell 1.8 percent against the yen to 71.51 yen <AUDJPY=R> and sterling was down 1.2 percent against the Japanese currency at 144.20 yen <GBPJPY=R>.

YEN AGAIN

Later in the day investors will look to U.S. inflation data, U.S. portfolio flow figures and the New York Federal Reserve’s manufacturing index ECON.

More surprises showing the economy isn’t poised to recover quite as much or as quickly as previously thought could reinforce investors’ desire to cut their exposure to risk, especially ahead of the weekend, supporting the yen.

"We are seeing a broad correction to the recent risk rally, and the yen is still seen by speculators as the favoured funding currency," BNP Paribas currency strategist Ian Stannard said.

Analysts said the yen’s outperformance suggests the recent evidence of Japanese investors looking towards their domestic markets is now translating into yen strength.

"The rate of reward (in foreign bonds) is on the wane and with rates set to be low across the world for the foreseeable future, Japanese investors are becoming increasingly risk intolerant and turning to their domestic market," Bank of New York Mellon currency strategist Neil Mellor said.

In interviews with Reuters late last month, many of the top nine Japanese life insurers said they would increase their holdings of yen bonds as uncertainty over a global economy deep in recession leaves them in defensive mode. [ID:nT231946]

Recent data also showed Japanese investors turned net sellers of foreign bonds in the week from April 26 to May 2 after three straight weeks of being sizeable net buyers [ID:nT75391].

(c)Reuters