Stock Market Plunge Drives Investors into Safe-Haven Yen

The steep drop in U.S. equity markets drove investors to seek shelter in the safety of U.S. Treasury markets. This drove down yields which made the U.S. Dollar a less-desirable investment.
James Hyerczyk
USD/JPY
USD/JPY

The U.S. Dollar fell sharply against a basket of currencies on Wednesday. The greenback was pressured primarily by a combination of a sharply higher Japanese Yen and a firm Euro.

The steep drop in U.S. equity markets drove investors to seek shelter in the safety of U.S. Treasury markets. This drove down yields which made the U.S. Dollar a less-desirable investment.

The plunge in stocks also helped support the Japanese Yen because of the carry trade. When risk is off, investors sell the dollar and buy the Yen to pay back loans from Japanese banks. Some traders call this taking protection in the lower-yielding Japanese Yen.

A rising Euro and British Pound also weighed on the dollar. Both were underpinned by optimism for a Brexit deal. According to events this week, there is more optimism that they will find some agreement between Britain and the European Union before Brexit. Earlier in the week, Brexit negotiators hinted at progress toward terms for Britain to leave the economic bloc in March. This gave investors some hope for an orderly departure, however, some also remained cautious due to the lack of details.

Gold

Gold finished higher on Wednesday, underpinned by a sharply lower U.S. Dollar and a steep drop in U.S. stocks. Given the size of the sell-off in both markets, one would have expected more from gold. However, investors may have been focused on rapidly rising Treasury yields and expectations of further rate hikes which tend to reduce demand for gold which doesn’t pay a dividend or interest. Once again, the big question for investors is whether gold is an investment or a hedge.

Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures settled sharply lower on Wednesday after the release of a bearish report from the American Petroleum Institute (API).

Late Wednesday, the API reported a major build of 9.75 million barrels of U.S. crude oil inventories for the week-ending October 5. Analysts were looking for a much smaller build of 2.62 million barrels. The build was the largest since February 2017.

The API also reported a 3.4 million barrel build in gasoline inventories for the week-ending October 5. Analysts had forecast a draw of 42,000 barrels.

Distillate inventories fell 3.5 million barrels the week-ending October 5 compared to an expected draw of 2.005 million barrels.

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