Forex traders seek safety on growing Fed fears

TOKYO (AFP) - The dollar fell against the yen on Tuesday but climbed against emerging market currencies as dealers bet the US Federal Reserve will soon begin winding down its vast stimulus programme.

With eyes on the release on Wednesday of minutes from the Fed's most recent policy meeting, expectations are that its year-long bond-buying, which has helped fuel a global equity and forex rally, could be coming to an end.

In late Asian trade the greenback bought 97.33 yen, against 97.56 yen in New York on Monday.

The euro was quoted at US$1.3336, against US$1.3334 in New York, while the single currency was trading at 129.82 yen, from 130.09 yen.

But the ore volatile currencies of developing countries were hit as investors shift into safer units ahead of the Fed's possible tapering.

The dollar rose to 63.69 Indian rupees, another record, while also buying 10,495 Indonesian rupiah, a four-year high, from 10,419 rupiah. The Thai baht was at a one-year low of 31.69 to the dollar, compared with 31.34. baht.

The rupee is Asia's worst-performing major currency this year, falling 16 per cent against the dollar since January as the Fed's wind-down comes on top of mounting concerns about the state of India's economy.

"Weakness in the Indian rupee and Indonesian rupiah has been particularly pronounced following a continued sell-off in Indian government bonds and a much larger-than-expected Indonesian second-quarter current account deficit," Barclays Capital said in a note to clients.

The Fed's US$85-billion-a-month easing policy saw a flood of cash into developing economies when it was launched last year as dealers sought out places with higher interest rates for better returns on their investments than in the West.

However, with the US economy showing signs of improvement, market-watchers say the central bank will likely slow down its bond-buying, which in turn will lead to higher rates and home and a repatriation of the money from emerging markets.