Forex - Yen gains as investors unwind riskier trades

The yen rose sharply on Thursday as investors ran from risky low-interest rate-funded trades following further revelations the US sub-prime mortgage crisis has spread to Europe. The Euro fell as much as 2.46% against the Yen and 1.5% against the Dollar after France's largest listed bank, BNP Paribas, temporarily suspended redemptions at three funds worth 1.6 billion euros ($2.2 billion), sending overnight US and euro zone borrowing rates soaring.
The high-yielding Australian and New Zealand Dollars dropped by respectively 3% and 4% against the Yen, as investors scrambled to unwind carry trades. In carry trades, investors borrow in low-yield currencies like the yen to finance investments denominated in high-yield currencies. Analyst said "It's a flight from risk. Those currencies with high yields that have been backed by speculative inflow have been crushed."
Reflecting liquidity fears, European overnight borrowing rates spiked to their highest level since October 2001, prompting the European Central Bank to inject around 95 billion euros ($130 billion) into the system in a quick overnight tender.
In yesterday trading, UsdJpy was down 1.5% at 117.94 while the EurJpy slid 2.46% to 160.97, the biggest daily drop in two years. In recent weeks, the Yen has maintained a tight negative correlation with US stocks, with investors buying back Yen when stock prices fall. US equities markets sputtered, with the Dow Jones industrial average down by 2.83%, as investors turned to safe-haven US Treasury bonds.
The EurUsd slipped 0.98% to 1.3667, well below July's record high near 1.3852. Analysts said the Euro may continue to be vulnerable against the dollar and the yen if credit market sentiment does not improve.
Meanwhile, high-yielding currencies fell, contrasting with Wednesday's trend, when investors embraced carry trades after the Federal Reserve predicted sustained economic growth.