August 12, 2019 / 7:32 AM / a month ago

FOREX-Yen shines as hedge funds flee from short bets

* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh

By Saikat Chatterjee

LONDON, Aug 12 (Reuters) - The yen gained on Monday, rising to its highest against the dollar in nearly a year and a half as hedge funds bought the Japanese currency on concerns that a prolonged China-U.S. trade war could tip the global economy into recession.

The rest of the foreign exchange market, meanwhile, saw major currencies such as the euro and the dollar pinned in tight ranges after Friday’s comments from U.S. President Donald Trump, saying that the United States would not agree a trade deal with Beijing for now.

Against the dollar the yen climbed a quarter of a percentage point to 105.32 yen, closing in on its highest against the U.S. currency since March 2018, barring a flash crash in January this year.

The yen also registered similar gains against the euro and the British pound, rising by a quarter of a percentage point and two tenths of a point respectively.

“Risk indicators and global markets have become more shaky and the yen is reflecting those concerns, and safe-haven shelters like the yen and the Swiss franc should continue to benefit,” said Commerzbank currency strategist Esther Reichelt.

Goldman Sachs has cut its forecast for U.S. economic growth, warning at the weekend that a trade deal is unlikely before the 2020 presidential election and that the risks of recession are increasing.

The yen is the top performer among its big rivals in global foreign exchange markets, rising 3% this month as investors have shown increased demand for Japanese government bonds after China weakened the yuan below 7 per dollar last week.

As a result, hedge funds that usually borrow in yen to finance leveraged bets in other asset classes have been forced into a rapid unwinding of short positions on the yen, sending the Japanese currency higher.

All eyes will be on Chinese figures on July retail sales and industrial output, due on Wednesday, to gauge the impact on domestic activity from the long-running trade conflict with the United States.

Market attention will also be on the U.S. Federal Reserve annual symposium at Jackson Hole later in the week, with investors seeking greater clarity on the future path of interest rates. Markets are expecting 60 basis points of rate cuts from the Fed by the end of the year.

The euro was a shade firmer against the dollar at $1.1207 , bound between resistance at $1.1249 and support at $1.1175.

Reporting by Saikat Chatterjee Editing by David Goodman

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