Yen and Swiss franc soar against dollar

The dollar dropped to a record low against the Swiss franc and its weakest level in two and a half years against the yen on Wednesday as tumbling stock markets drove investors to the safety of low-yielding currencies.

Equities lost ground after weak US retail sales figures on Tuesday sparked fresh fears that a slowdown in the US would spill over into the global economy.

Analysts said rising risk aversion had prompted investors to abandon carry trades, in which low-yielding currencies such as the yen and Swiss franc are sold to finance the purchase of riskier, higher-yielding assets elsewhere.

"Risk aversion is the only story in town, perhaps combined with a bit of dollar weakness," said Adam Cole at RBC Capital Markets.

"So the dollar is the perfect currency to sell against the yen in this environment."

The dollar fell 0.6 per cent to Y106.10 against the yen, its weakest level since May 2005, and dropped 0.4 per cent to an an all-time low of SF1.0884 against the Swiss franc.

The dollar was flat against the euro at $1.4810, however, as the single currency also suffered against the rampant yen.

Indeed, the yen rose 0.5 per cent to Y157.15 against the euro, climbed 0.7 per cent to Y207.95 against the pound and gained 1.4 per cent to Y81.86 against the higher-yielding New Zealand dollar.

Meanwhile emerging market currencies - which have generally been resilient in the last few weeks despite negative US economic data and weakness in US stocks - also came under pressure.

Jens Nordvig at Goldman Sachs said the fact that emerging market equities suffered a sharp correction on Tuesday could signal that a downward shift in market expectations for growth outside the US had now started.

"With weakness in US stocks now clearly affecting global equity markets, including key emerging markets, we think some high-risk emerging market currencies are looking vulnerable," he said.

In particular, Mr Nordvig said, currencies which had been supported by equity inflows and which were not not supported by rising domestic interest rates, like the Turkish lira and Philippine peso, might be most at risk.

Indeed, the Turkish lira dropped 1.5 per cent to TL1.1720 against the dollar, while the Philippine peso fell 1.2 per cent to 40.75 pesos and the South African rand lost 1.3 per cent to R6.9163.

Elsewhere, the pound lost ground, easing 0.1 per cent to $1.9600 against the dollar and losing 0.2 per cent to £0.7554 against the euro.

The pound's fall was triggered by a survey from the Royal Institute of Chartered Surveyors that showed confidence in the UK property market had dropped its lowest level since the housing crash of the early 1990s.

However Adrian Schmidt at RBS said with 125 basis points of UK interest rates cuts already priced into the market this year, sterling already down 5 per cent on a trade-weighted basis the last month, and the market now heavily short sterling, there was less downside for the pound in the short run.