TOKYO (Reuters) – The Japanese yen, a traditional safe-haven currency, gained strength on Wednesday, while riskier currencies such as the Australian dollar and the British pound struggled as investors sought refuge following a significant downturn on Wall Street, the worst in nearly a month.
The trigger for this market anxiety was weak U.S. manufacturing data, which raised fears of a potential economic slowdown in the world’s largest economy. This comes as traders are already on edge ahead of the critical monthly U.S. payrolls report due on Friday.
“Global markets are showing signs of a growing fear of an economic downturn,” noted Kyle Rodda, senior financial market analyst at Capital.com.
Rodda pointed out that the most significant market movements were seen in foreign exchange and commodities, particularly highlighting a sharp decline in crude oil prices, which fell by nearly 5% overnight.
As of 0047 GMT, the yen had strengthened by approximately 0.3%, trading at 145.02 per dollar after a 1% surge overnight against a generally stronger U.S. dollar.
The dollar-yen exchange rate is closely linked to long-term U.S. Treasury yields, which dropped nearly 7 basis points (bps) overnight and continued to fall in Asian trading hours, settling at 3.8329% as investors shifted towards the safety of bonds.
Despite the concerns surrounding the U.S. economy, the dollar remained robust against most major currencies, as it often attracts safety-driven flows even in times of domestic economic uncertainty.
The British pound slipped to $1.3110, following a 0.23% decline the previous night, while the euro edged up slightly to $1.10495 after a 0.26% drop in the previous session. The Australian dollar continued its slide, falling another 0.15% to $0.67015, extending its 1.2% drop from Tuesday.
Concerns over the U.S. achieving a “soft landing” have led traders to increase the likelihood of a 50 basis point (bp) interest rate cut by the Federal Reserve on September 18, with odds rising to 38% from 30% just a day earlier, according to the CME Group’s FedWatch Tool.
“Markets are on edge ahead of Friday’s critical non-farm payroll report, which is expected to heavily influence whether the Fed decides on a 25 or 50 basis point cut,” said Gavin Friend, senior markets strategist at National Australia Bank.
All these market movements indicate a shift towards safer assets, with investors adopting a more cautious stance.
Economists polled by Reuters predict that Friday’s report will show an increase of 165,000 U.S. jobs in August, up from the 114,000 jobs added in July.
Before Friday’s report, investors will closely monitor job openings data on Wednesday and the jobless claims report on Thursday.
U.S. markets reopened on Tuesday after the Labor Day holiday to a disappointing Institute for Supply Management (ISM) survey, which suggested that factory activity in the country is likely to remain sluggish.
“This report, which was expected to show a gain, actually revealed a decline, raising fresh concerns that the Federal Reserve may have acted too late,” commented Sam Stovall, chief investment strategist at CFRA.
“Although it’s a short week, it’s going to be crucial for investor sentiment,” Stovall added. “Market participants are likely to remain cautious and on high alert.”
