FOREX-Dollar down as 'Sell America' trade revives; yen slumps on Japan fiscal worries

By Kevin Buckland

TOKYO, Jan 21 (Reuters) - The dollar languished near three-week lows against the euro and Swiss franc on Wednesday after White House threats over Greenland triggered a broad selloff in U.S. assets, from the currency to Wall Street stocks and Treasury bonds.

The yen was also on the ropes following a surge in Japanese government bond yields to record highs as investors worried about fiscal largesse with Prime Minister Sanae Takaichi looking to expand her mandate in snap elections next month.

China's yuan retreated from a 32-month high after the central bank unexpectedly weakened its daily midpoint guidance for the carefully controlled currency.

The South Korean won rebounded strongly from a four-week low after President Lee Jae Myung said the country's officials expected the currency to strengthen to levels not seen since early October.

Declines in the U.S. dollar accelerated sharply overnight with a 0.53% slide in the dollar index =USD - which measures the currency against six major peers - marking its worst single-day performance in six weeks. On Wednesday, it was up slightly at 98.612.

The greenback dropped more than 1% against Europe's shared currency at one point on Tuesday to the lowest since December 30 at $1.1770 per euro EUR=. It was last changing hands at $1.1716.

The dollar plunged nearly 1.2% to reach 0.78795 Swiss franc CHF= on Tuesday, also the lowest since December 30, before recovering slightly to last trade at 0.7911 franc.

On Monday, U.S. President Donald Trump's renewed tariff threats against European allies over Greenland prompted a repeat of the so-called "Sell America" trade that emerged following U.S. tariff announcements last April.

Investors dumped dollar assets on "fears of prolonged uncertainty, strained alliances, a loss of confidence in U.S. leadership, potential retaliation and an acceleration of de-dollarisation trends," said Tony Sycamore, market analyst at IG in Sydney.

"While there are hopes the U.S. administration may soon de-escalate these threats, as it has with prior tariff announcements, it is clear that securing Greenland remains a core national security objective for the current administration," he said.

The S&P 500 and Nasdaq Composite dropped to their lowest points in a month on Tuesday, as investors returned from the U.S. long weekend. Treasury yields, which rise when bond prices fall, vaulted to multi-month peaks.

YEN SELLOFF

The dollar was steady against the yen, however, with the Japanese currency suffering its own selloff after Takaichi on Monday called snap elections for February 8 and pledged a wave of measures to loosen fiscal policy.

The longest tenors of Japanese government bonds were hit hardest, with the 40-year yield JP40YTN=JBTC spiking 27.5 basis points to a record-high 4.215% on Tuesday, although on Wednesday that eased slightly to 4.1%.

The yen traded at a record low of 200.19 per Swiss franc on Tuesday CHFJPY=, and remained close to that level on Wednesday, changing hands at 200.14.

Japan's currency languished at 185.33 per euro EURJPY=, very close to the record low of 185.575 from a week ago.

The Bank of Japan is due to decide monetary policy on Friday, but after hiking interest rates at its previous meeting in January, no change is expected.

Instead the focus will be on communication over the scope and pace of further tightening.

"The communication at this meeting is likely to maintain a somewhat hawkish stance," Mizuho Securities strategists wrote in a research note.

"It is fully expected that the Bank of Japan will emphasize the risk of rising prices against the backdrop of the weak yen spreading to the underlying inflation rate."

The Chinese yuan CNY=CFXS weakened 0.1% to 6.9659 per dollar in onshore trading, after hitting 6.9570 on Tuesday, the highest since May 2023.

Prior to Wednesday's opening, the People's Bank of China surprised markets by setting the midpoint rate CNY=PBOC at 7.0014 per dollar, 8 pips softer than the previous setting of 7.0006, in a move that some took as drawing a line at the psychologically significant 7 per dollar mark.

South Korea's won KRW=KFTC had slipped to the weakest since December 24 at 1481.4 per dollar early on Wednesday, but reversed direction after President Lee said local authorities see the won rising to around the 1,400-per-dollar level in a month or two. It was last around 0.5% stronger on the day at 1,469.9.

South Korean officials have rolled out various policy measures since late last year to support a currency hovering around 16-year lows, saying the recent depreciation was not in line with economic fundamentals.