Dollar sinks to 2-year low against yen

The dollar Wednesday fell nearly 1% to its lowest level against the yen in two years on concern that widening credit-market losses would slow global economic growth.

The currencies of Australia, South Africa and New Zealand tumbled more than 3% versus the yen as investors exited higher-yielding assets funded by low-cost loans in Japan -- the so-called carry trade, which has been a key strategy for many hedge funds and other global investors.

The dollar also fell to record lows against the euro and Swiss franc on speculation that the Federal Reserve would cut interest rates a third time this year to prevent a recession.

The dollar traded at 108.68 yen in New York, down from 109.69 yen Tuesday and the lowest level against the Japanese currency since June 2005. As late as mid-October, the greenback was trading at 117 yen.

In carry trades, investors borrow money in low-interest-rate economies such as Japan and invest the funds in higher-yielding assets in other countries to profit from the spread.

A big risk is that currency moves could wipe out earnings from the trades. As the yen strengthens, it pressures investors to sell the higher-yielding assets and pay off their yen loans. To do that they must exchange other currencies for yen, pushing up the yen’s value.

Also weighing on the dollar’s value versus the yen are bets that the Fed will cut interest rates next month to keep the economy from slipping into recession, some analysts say.

Lower interest rates tend to make a country’s currency less attractive to foreign investors.