The dollar hovered near a six-week low versus the yen on Thursday, weighed down against the safe-haven Japanese peer as risk aversion gripped broader markets amid concerns the U.S.-China trade conflict could escalate.
Markets were nervously awaiting the start of two-day trade talks in Washington later in the global day to see if Chinese negotiators can convince the White House to back down on a threatened tariff hike on Friday.
The U.S. currency stood at 109.910 yen after going as low as 109.70 overnight, its weakest since March 25.
The Japanese currency, which has advanced against a number of peers, tends to attract demand in times of political strife and market turmoil.
This week, expectations that the United States and China would reach an agreement soon to end their trade war have been upended, sending investors fleeing from riskier assets. Global stocks have retreated and government bonds have surged.
Washington has accused Beijing of backtracking on commitments made during trade negotiations and U.S. President Donald Trump has threatened to hike existing tariffs on Chinese goods on Friday and impose fresh levies soon if there is no deal.
Trump said on Wednesday that China “broke the deal” reached in talks with the United States, and vowed to not back down on imposing new tariffs unless Beijing “stops cheating our workers”.
Shin Kadota, senior strategist at Barclays (LON:BARC) in Tokyo, said the yen “owes much of its strength to gains made in the cross currency market. ‘Risk on, risk off’ has been the main market driver and the euro has been stuck in range as a result.”
While the possibility that the fresh trade talks will fall through “is not yet a main scenario, the currency market is gradually beginning to price in such a likelihood,” he said.
The Australian dollar touched a four-month low of 76.55 yen. The Aussie has shed roughly 1.8 percent against the yen this week.
The euro struggled near a four-month trough of 122.89 yen , having weakened more than 1 percent this week.
Against the dollar, the euro was flat at $1.1190 , having spent the week in a tight $1.1218-$1.1155 range.
The dollar index against a basket of six major currencies was little changed at 97.612 .
According to the latest Commodity Futures Trading Commission data, speculators have further raised their net long dollar bets, including those against the yen.
Attention focussed on which potential factors could prompt a reversal of such positions, causing the dollar to be sold and the yen to be bought back.
“The trigger for a reversal in dollar longs against the yen could be U.S.-China trade talks, the Fed taking a dovish tilt or North Korean missile experiments,” said Daisuke Karakama, chief market economist at Mizuho Bank.
“Of these, the likely candidate is heightened rate cut expectations, as it is no secret that President Trump wants a dovish Fed.”
The New Zealand dollar was down 0.1 percent at $0.6571 .
The kiwi had slumped to a six-month trough of $0.6525 on Wednesday, when the Reserve Bank of New Zealand (RBNZ) cut interest rates to a record low 1.5 percent.
But the currency has managed to claw back as the RBNZ did not give a strong indication of upcoming easing, saying interest rates were “balanced” at the moment.