Yen climbs as gold dip triggers market volatility

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By Gregor Stuart Hunter

SINGAPORE (Reuters) -The U.S. dollar weakened in Asian trading on Wednesday, edging back from its highest level against the Japanese yen in a week, as a short-lived dip in gold prices triggered a rebalancing across various safe-haven assets.

Gold rose 0.5% to $4,145.29 per ounce after its biggest one-day plunge in five years the previous session. Investor confidence proved fragile, with bullion prices briefly falling to a one-week low of $4,003.39 during the morning, taking the shine off the best rally for the metal in almost half a century.

“What goes up has to go down,” said Alex Hill, managing director at Electus Financial Ltd in Auckland. “You’ve had a market that’s gone parabolically higher, at some point it’s going to get some relief.”

The yellow metal is experiencing its best performance since 1979 on expectations that U.S. President Donald Trump’s unorthodox economic policies and attacks on the independence of the Federal Reserve will undermine the dollar as the global reserve currency, which has led some central banks to diversify their assets into precious metals. But analysts said that trade had become too crowded.

“Gold had run ahead of the ‘debasement’ story,” Citi wrote in a research note. “We had flagged that prices were stretched to levels previously associated with pullbacks and had reduced our long position accordingly.”

The U.S. dollar was last 0.1% weaker at 151.74 yen, after the release of data showing Japanese exports rose in September for the first time in five months.

Japan’s new Prime Minister Sanae Takaichi is preparing an economic stimulus package that is likely to exceed last year’s 13.9 trillion yen ($92.19 billion) to help households tackle inflation, government sources familiar with the plan told Reuters on Wednesday.

The yen has lost 2.6% this month as Takaichi jostled to become Japan’s prime minister, marking its biggest monthly decline against the greenback since July, as investors anticipated expansionary fiscal policy and a testy relationship with Japan’s central bank would weigh on the currency.

While volatility has erupted over the past few weeks in cryptocurrencies, U.S. regional banks and now gold, the U.S. dollar has remained relatively stable, said Tony Sycamore, market analyst at IG in Sydney.

“We’re seeing an increase in volatility,” he said. “Positioning is crowded in so many asset classes that it’s causing these flare-ups.”

The dollar index, which measures the greenback’s strength against a basket of six currencies, was last trading at 98.84, slipping 0.1% after three consecutive days of gains. President Donald Trump on Tuesday rebuffed a request by top Democratic lawmakers to meet until the three-week-old U.S. government shutdown ends.

Expectations that the shutdown will end soon are dwindling, according to the prediction market site Polymarket, which is pricing a 40% implied probability that the U.S. government will remain closed until November 16 or later.

The standoff complicates the task facing the Federal Reserve at its meeting on October 29, but the central bank is still expected to lower its key interest rate by 25 basis points next week and again in December, according to a Reuters poll of economists who remain deeply divided on where rates will be by the end of next year.

Fed funds futures imply a 97.3% probability of a 25-basis-point cut to interest rates, compared with a 99.4% chance yesterday, according to the CME Group’s FedWatch tool.

The euro was trading 0.1% stronger at $1.16135 as a planned summit between Trump and Russian President Vladimir Putin was put on hold after Russia rejected an immediate ceasefire in Ukraine.

Sterling was last unchanged at $1.33785 ahead of the release of inflation data for September due later today.

The Australian dollar was last up 0.2% at $0.6503, while the kiwi dollar was 0.2% stronger at $0.5753.

(Reporting by Gregor Stuart Hunter; Editing by Sam Holmes amd Kate Mayberry)