Japan, Swiss FX emerge winners this week as trade war fears escalate

By Saikat Chatterjee

LONDON (Reuters) - The Japanese yen raced to its highest level in more than 16 months and the Swiss franc surged on Friday as the growing threat of a trade war prompted investors to take shelter in perceived low-yielding currencies.

With short positions in the yen at near record highs, according to weekly positioning data, thanks to years of using the Japanese yen as a funding currency to buy high yielders, markets braced for some unwinding of those bets.

"Trade wars, the spike in dollar funding costs and a tricky quarter end means that currency markets can become a bit messy going into next week," said Marc Ostwald, a global strategist at ADM Investor Services International in London.

The dollar fell to as low as 104.635 yen on Friday, the greenback's lowest level since November 2016. The dollar was last down 0.5 percent at 104.80 yen .

The broad rise in the yen came as financial markets were rattled by worries over rising U.S.-China trade tensions.

U.S. President Donald Trump signed a presidential memorandum on Thursday that will target up to $60 billion of Chinese products with tariffs, but only after a 30-day consultation period that starts once a list of goods is published.

The broad rise in the yen came as financial markets were rattled by worries over rising U.S.-China trade tensions.

A gauge of stress in the U.S. money markets climbed to its highest level in nearly nine years on Tuesday on concerns about growing costs for banks and other companies to borrow dollars and further interest rate increases from the Federal Reserve.

The gap between the three-month dollar London interbank offered rate and three-month overnight indexed swap rate expanded to 58 basis points, the widest since May 2009, according to Thomson Reuters data.

In a week that the U.S. Federal Reserve broadly stuck to its "dot plot" on future interest rate moves and signaled a relatively upbeat outlook for the economy, 10-year U.S. Treasury yields are on track to post its second biggest drop so far this year, further weighing on the greenback.

"The FX market itself isn't sure and its reaction to risk-off and lower bond yields across the board is to by the yen and the Swiss franc," Kit Juckes, an FX strategist at Societe Generale (PA:SOGN) wrote in a daily note.

Against a basket of its rivals, the dollar (DXY) was on track to fall 0.2 percent, taking its weekly losses to about 0.6 percent, its biggest drop in a month.

The Swiss franc was also the other notable winner in currency markets this week with a 0.6 percent rise.

In other currencies, sterling was relatively stable in the backdrop of an EU summit with the British currency changing hands at $1.4107.

(GRAPHIC: World FX rates in 2018 http://tmsnrt.rs/2egbfVh)