The yen peaked higher against the greenback on Wednesday as falling oil costs sparked AN capitalist flight into safer assets, driving down U.S. debt yields to 10-month lows and dulling the greenback's attractiveness.
The dollar fell 0.3 percent to 119.64 yen JPY=, pulling away from a six-week high of 121.70 yen set on Friday after the Bank of Japan stunned the markets by adopting a negative interest rate policy.
But oil prices have since resumed declining, shaking equity markets and bringing investors' focus back to global growth woes.
Since China growth concerns began shaking the markets in August, the broad theme has been central banks versus global risk.
The yen benefited from the latest round of 'risk off'. The euro, which gained as U.S. yields fell, has also become a sort of safe-haven since August. I don't see China woes subsiding soon and the central bank versus global risk theme could play out indefinitely.
The euro eased 0.1 percent to $1.0915 EUR=, but was still up around 0.8 percent so far this week.
The 10-year U.S. Treasury yield US10YT=RR fell to 1.828 percent at one point on Wednesday, the lowest since April 2015.
Such falls in U.S. yields amid concerns about slowing U.S. economic growth and growing investor doubts about how much the Federal Reserve can raise interest rates this year have posed headwinds for the dollar.
Still, the Bank of Japan's foray into negative interest rates may eventually trigger capital flows that lend support to the dollar against the yen, market participants say.
With many Japanese government bond yields now in negative territory, global FX reserve managers may shift some of their holdings into the dollar and away from the yen.
A lot of sovereign reserves are in yen, and they might want to consider shifting out of yen... In many of these boardrooms there's an opposition to hold too much currencies with negative yield.
In the wake of the BOJ's surprise move, Japanese government bonds with maturities of up to eight years are now being quoted with negative yields.
We definitely saw a shift away from the euro and in favour of the yen before and now we may see a move away from the yen.