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Dollar, yen firm as investors shun risky assets

LONDON - The dollar held firm and the yen gained broadly on Wednesday as investors shied away from riskier assets on concerns about China tightening lending and U.S. monetary and political wrangling.

European shares were down 0.3 percent following losses in Asia and on Wall Street overnight.

“Asset markets are unsettled with knock-on effects into the pro-cyclical and commodity currencies, and I’d be looking for those currencies to continue to come under pressure”, said Ian Stannard, senior currency strategist at BNP Paribas.

By 1245 GMT, the euro was flat on the day at 126.06 yen after hitting a nine-month low of 125.25 yen. The next downside target was seen near its April 2009 low of 124.38.

“Euro/yen and Aussie/yen in particular are vulnerable to a more disorderly decline should we see further weakness, given Japanese margin accounts on the Tokyo Financial Exchange were holding near record longs on these two crosses as of Friday,” analysts at RBC Capital Markets said in a note.

The yen trimmed gains versus the dollar to trade at 89.55 yen after hitting a six-week high of 89.14 yen on trading system EBS.

News of artillery fire between North and South Korea also helped the yen, a reaction traders said stemmed from a dip in South Korean shares.

“In spite of Japan’s insipid growth, chronic deflation, the risk of more quantitative easing and threat of intervention, the yen retains its safe haven status,” State Street analysts said.

The euro hit a six-month low against the dollar, hurt by concerns about the fiscal health of Greece and other peripheral euro zone countries.

The premium investors demand to hold 10-year Greek debt rather than benchmark Bunds hit a fresh euro lifetime high.

The euro later trimmed losses to trade flat on the day at $1.4075, after hitting a low of $1.4022. Traders said option-related demand was evident ahead of $1.4000.

Eurogroup head Jean-Claude Juncker told French business daily Les Echos he was unhappy with imbalances that have produced an overvalued euro.

German consumer inflation data was due out later in the day, with weaker regional numbers pointing to benign price pressures in the euro zone this month.

Fed, Obama eyed

The U.S. Federal Reserve will conclude a two-day policy meeting on Wednesday against the backdrop of a Senate debate over Chairman Ben Bernanke’s reconfirmation. Analysts expect a statement due out at around 1915 GMT to show little change from the last one.

Markets also focused on U.S. President Barack Obama’s State of the Union address. Last week, Obama’s proposed reforms to curb risky bank lending spooked markets.

The dollar index was unchanged at 78.44 after closing above its 200-day moving average on Tuesday for the first time since early May 2009.

Investors remained nervous tightening measures in China could curb growth and demand for exports from other economies.

The Industrial and Commercial Bank of China, the country’s largest bank, said on Wednesday it had stopped rolling over some loans to slow credit growth.

The Australian dollar rose 0.2 percent against the U.S. dollar as a rise in consumer prices reinforced views the Reserve Bank of Australia will raise rates next week.

The Aussie also dipped below 80 yen, its lowest since mid-December last year.