Safe-haven yen moves upward

On Monday, Japan’s yen strengthened as investors turned to safer assets following the news of UBS’ acquisition of Credit Suisse at a reduced price. As part of the deal, $17 billion of Credit Suisse additional tier-1 bonds will be eliminated, frustrating debt holders who believed they would be better protected than shareholders, and causing unease among investors in other banks’ AT1 bonds. The yen has long been considered a secure currency to hold during times of stress and, as Asian bank stocks fell overnight and spread to Europe, the yen rose. The dollar decreased to its lowest level since February 10 at 130.55 yen and dropped by 0.75% to 130.83.

Takahiro Sekido, the chief Japan strategist at MUFG, said that “the market’s driving force is risk aversion.” He added that he was not particularly pessimistic, but that it was necessary to wait and see how much risk contagion Europe would experience. The banking stocks index in Europe fell 3.12% in early trading, while other currencies remained largely unchanged. The euro declined 0.11% against the dollar to $1.065, while the British pound increased 0.14% to $1.22. The dollar climbed 0.31% against the Swiss franc to 0.929.

Central banks took steps on Sunday to boost the flow of money worldwide, as part of regulators’ efforts to boost trust in the global banking system. During the COVID-19 crisis in 2020, they implemented similar actions. The US Federal Reserve offered daily currency swaps to ensure banks in Canada, Britain, Japan, Switzerland, and the eurozone had the dollars necessary to operate.

The US bond rally contributed to the decline in the dollar, making it less appealing as a safe-haven asset. The US dollar index was unchanged at 103.79 after a 0.73% decrease last week. As US yields decreased, making the dollar less attractive, Alvin Tan, head of Asia FX strategy at RBC Capital Markets, said the yen is the “cleanest safe-haven in FX.” 10-year US Treasury yields dropped 8 basis points to 3.313% on Monday as investors moved into government bonds, which are considered to be the safest assets. They also wagered that the Federal Reserve will have difficulty raising interest rates significantly higher.