The dollar had its biggest one day drop in three weeks against the Japanese yen yesterday after a report showed a sharp outflow of funds from the US in August.
Selling in the US currency against the yen started in Asian trading but picked up after the US Treasury said the country registered a record net $163 billion outflow in August.
Foreign investors fled from dollar-denominated assets during that month as a meltdown in the US subprime mortgage market triggered a global credit crunch. The turmoil prompted a half-percentage-point cut in the benchmark interest rate by the Federal Reserve in September.
"Investors seem to be moving money outside of the US, which leads us to believe they are planning for a continual US dollar decline," said Mark Meadows, currency strategist at Tempus Consulting in Washington.
"What they are saying is they are not going to receive as much in return as it will cost them to hold US dollars."
In late morning trading in New York, the dollar was 0.7 per cent lower against the yen at 116.58, its biggest one-day drop since Sep-tember 20 at current prices. The euro traded 0.3 per cent lower on the day at $1.4162.
Fed Chairman Ben Bernanke said late on Monday that US financial markets are healthier after a turbulent summer, and that the Fed would support market stability.
Some analysts said the surprising outflows were simply a snapshot of a really tough month, and should not be seen as an indication that the crisis is deepening.
"Rather than reflect a crisis in confidence in the US economy and the dollar, the dreadful TICs numbers for August indicate the extent to which foreign investors were forced to sell liquid investments to fund bad investment," Michael Woolfolk, a senior currency strategist at The Bank of New York Mellon, said in a note to clients.
Still, risk aversion rose, sending stocks worldwide lower on Tuesday and prompting investors to unwind carry trades, helping push the low-yielding Japanese currency higher while weighing on high-yielders. In carry trades, investors borrow in low-yielding currencies like the yen to invest in high-yielding currencies.
The Australian dollar fell more than 1 per cent to trade at 0.8853 to the US dollar and the New Zealand dollar plunged more than 2 per cent to 0.7434. The yen also fell against the euro and last traded 1 per cent lower at 165.18.
Another report, showing US industrial production rose 0.1 per cent in September, matched expectations and had little impact on currency trading.
"It was exactly as expected," said Ron Simpson, director of currency research at Action Economics in Tampa, Florida.
US Treasury Secretary Henry Paulson yesterday reiterated that he believed a strong dollar was in America's interests, in remarks aimed at his colleagues in the Group of Seven who will meet here on Friday.
"In terms of the upcoming G7 ... the strong dollar is in our nation's interest. I have said repeatedly that, and currency values should be determined in competitive markets, based on underlying economic fundamentals," he said in response to a question after a speech at Georgetown University law school. ( Reuters )