Tokyo - The dollar began the week on the back foot on Monday as a bout of risk aversion underpinned the yen, though losses were limited as the US currency garnered some support on renewed talk of a possible rate hike by the Federal Reserve as early as this month.
The safe-haven yen benefited from a broad drop in equities, with Tokyo's Nikkei slipping to a two-week low. The dollar was down 0.3 percent at 102.445 yen, while the euro slipped 0.2 percent to 115.15 yen.
The currency market also kept an eye on the sell-off in global bonds, with perceived limits to central bank policies having taken German and Japanese sovereign bond yields to multi-month highs. US Treasury yields have also tracked their global peers higher.
“The rise in global bond yields are being seen as a negative factor by the risk asset markets, which in turn is supporting the yen and capping the dollar,” said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo.
The Bank of Japan is now studying several options to steepen the bond yield curve, say sources familiar with its thinking, as authorities desperately seek out policy tools to revive an economy that has failed to emerge from stagnation despite years of massive stimulus.
While the stock market's fall was the main driver behind the yen's firmer showing, the Japanese currency also benefited from its safe haven status in reaction to Democratic candidate Hillary Clinton falling ill at a September 11 memorial ceremony and diagnosed with pneumonia.
Markets have generally assumed Clinton would win the presidency and have not truly considered the implications, both economic and for national security, should Donald Trump prevail.
Last week's nuclear test by North Korea, its fifth and biggest, has already unsettled global markets. And on Monday South Korea's Yonhap News Agency cited South Korean government sources saying North Korea has completed preparations for another test.
Disappointment at the European Central Bank's failure to deliver more stimulus last week has weighed on euro zone bond markets.
Against the dollar, the euro edged up 0.1 percent to $1.1239 .
A spate of Fed speakers kept hopes alive for a September rate hike, despite some recently disappointing economic data including only a modest rise in US nonfarm payrolls.
After Boston Federal Reserve President Eric Rosengren spoke on Friday, odds on a rate hike in September rose to 30 percent probability from 24 percent before his comments.
Monday is the final day on which US policymakers can speak in public before the “blackout period” begins a week before the September 20-21 meeting. Fed governor Lael Brainard was suddenly scheduled late last week to give a talk in Chicago on Monday.
“Market participants are wondering if maybe she's being wheeled out to give the market one last warning of a rate hike at next week's meeting,” Marshall Gittler, head of investment research at FXPrimus, said in a note.
“The thinking is that if someone as dovish as she is starts talking like a hawk, people will notice,” Gittler said.
Speculators increased their bets on the US dollar for the first time in six weeks in the week ended September 6, according to Reuters calculations and data from the Commodity Futures Trading Commission released on Friday.
Japanese yen net long positions fell to their lowest level since mid-August.
The prevailing risk off mood did not bode well for Antipodean currencies.
The Australian dollar was down 0.3 percent at $0.7524 and the New Zealand dollar was little changed at $0.7316 after losing 1 percent the previous day.
REUTERS