The yen climbed to a 13-year high against the dollar as a worldwide rout in stocks encouraged investors to dump higher-yielding assets and pay back low-cost loans in Japan.
Japan's currency surged to the strongest in six years against the euro, posting its biggest gain ever, as the prospect of a deepening global recession prompted the unwinding of carry trades. The pound fell below $1.53 in its biggest drop in at least 37 years after the U.K. economy shrank in the third quarter, bringing it to the brink of recession. The dollar rose to a two-year high versus the euro as investors took refuge.
The pound depreciated as much as 5.9 percent to $1.5269, the lowest level since August 2002, after the Office for National Statistics said U.K. gross domestic product dropped 0.5 percent from the second quarter, the first contraction since 1992. Sterling's intraday decline surpassed that on Black Wednesday in September 1992, when the U.K. was driven out of Europe's exchange-rate mechanism. Against the euro, the pound weakened to a record 81.96 pence.
The yen gained against the Australian dollar versus the New Zealand currency on speculation the rout in global stocks will encourage investors to unwind trades in which they get funds in a country with low borrowing costs and buy assets where returns are higher.
The euro and the pound may weaken further because European and U.K. banks have five times as much loan exposure to emerging markets as the U.S. or Japan, with most lending to Eastern Europe, according to Morgan Stanley.
European banks' lending to emerging markets is about 21 percent of Europe's gross domestic product and U.K. banks' loans are around 24 percent of national output, compared with 4 percent for the U.S. and 5 percent for Japan, wrote London-based currency strategists Stephen Jen and Spyros Andreopoulos in a research note yesterday, citing data from the Basel, Switzerland-based Bank for International Settlements.
``Part of the reason why euro-dollar continues to drift lower has to do with the rising risk that pressures in Eastern Europe will have a negative boomerang effect on Euroland,'' the strategists wrote.