Dollar languishes near three-and-a-half-month lows ahead of Yellen testimony
Thomson ReutersAn employee of KEB counts U.S. one hundred dollar notes at the bank's headquarters in Seoul
By Hideyuki Sano and Masayuki Kitano
TOKYO/SINGAPORE (Reuters) - The dollar nursed losses around three-and-a-half-month lows on Wednesday, pressured by fears of a global economic slowdown following recent falls in oil prices and growing concerns about the health of European banks.
Many traders suspect those troubles will prevent the U.S. Federal Reserve from raising interest rates in the near future and look to Fed Chair Janet Yellen's congressional testimony later in the day for clues on the outlook for policy.
The dollar index <.dxn> eased 0.1 percent to 95.939, not far from a 3-1/2-month low of 95.663 set on Tuesday.
The low represented a 4.8 percent decline from its 12-1/2-year peak touched in early December when the consensus was for the Fed to keep raising rates this year, stoking a global capital rush of funds to higher-yielding dollar assets.
"Concerns about European banks are contributing to the risk off mood in markets. In addition, U.S. data this month has been weak and Fed officials appear to be toning down on rate hikes," said Shinichiro Kadota, chief FX strategist at Barclays in Japan.
The dollar's fall has been most notable against the yen, which had been depressed at low levels over a long period because of the Bank of Japan's aggressive monetary easing since 2013.
The dollar fell 0.7 percent to 114.37 yen , not far from its 15-month low of 114.205 yen hit on Tuesday.
A fall in Japan's benchmark Nikkei share average <.n225> to its lowest levels since October 2014 helped spur demand for the safe-haven yen, analysts said.
Such weakness in Japanese equities could dampen Japanese investors' risk appetite and weigh on the dollar versus the yen in coming months, said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.
"The story could start to shift toward a worsening in Japan's economy that in turn dampens yen-selling by Japanese investors," Murata said.
The options market indicates that investors want protection against further falls in the dollar against the yen.
Risk reversal spreads, which measure the price gap between the yen calls and yen puts, are at their widest in favor of yen calls since 2010 , suggesting huge demand for yen calls, or right to buy the yen.
At a time of economic stress, countries or regions running current account surpluses, such as Japan, the euro zone and Switzerland, are seen as safer compared to those that have deficits and rely on foreign capital to finance the gap.
The United States, UK and Australia fall into the latter category.
That explains why the euro is supported despite surprisingly weak German industrial output data on Tuesday and the banking woes in the continent.
The euro held steady at $1.1295 , having hit a 3-1/2 month high of $1.13385 on Tuesday.
"At the moment, the euro has a very high inverse correlation with risk assets," said Kadota at Barclays.
Global share prices have come under renewed pressure this week, with MSCI's broadest gauge of world stocks <.miwd00000pus> having edged back to near a 2-1/2 year low hit last month.
The Swiss franc stood firm at 0.9723 franc to the dollar , near a 3-1/2-month high of 0.9695 set on Tuesday.
(Editing by Shri Navaratnam and Kim Coghill)
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