Investing.com - The dollar was sharply lower against the yen and a basket of other major currencies on Tuesday as risk from political instability in Greece and new restrictions on China’s debt markets bolstered demand for the traditional safe haven yen.
USD/JPY dropped 1.77% to 118.56, off the seven year peaks of 121.81 struck on Monday.
The dollar tumbled and global equity markets sold off following a surprise decision by the Greek government to bring forward a parliamentary vote for president to next week, a move which could trigger early elections if Prime Minister Antonis Samaras’ candidate is not chosen.
Market sentiment was also hard hit by a Chinese government decision to set new restrictions on collateral for short-term loans. The decision fuelled fears that China’s economy is slowing at a faster rate than anticipated.
The yen also gained ground against the euro, with EUR/JPY down 0.81% to 147.44.
Demand for the dollar looked likely to remain supported by the diverging monetary policy stance between the Federal Reserve and central banks in Japan and Europe.
Last week’s strong U.S. jobs report for November prompted investors to bring forward expectations for the first hike in interest rates to mid-2015 from September 2015 ahead of the report.
The dollar received a boost earlier Tuesday after the Wall Street Journal reported that Fed officials are looking at dropping an assurance that interest rates will stay low for a "considerable time", in its statement, following its upcoming policy meeting next week.
EUR/USD advanced 0.84% to 1.2416, recovering from Monday’s two year trough of 1.2246. The dollar was also weaker against the Swiss franc, with USD/CHF down to 0.9678.
Sterling pushed higher, with GBP/USD up 0.22% to 1.5688, but gains were held in check after data showing U.K. industrial output unexpectedly fell in October, pulled down by a steep drop in manufacturing.
Industrial production fell 0.1% in October as manufacturing output fell 0.7%, the largest monthly decline since May.
The commodity exposed currencies regained ground, with AUD/USD up 0.65% to 0.8344 after falling to four year lows of 0.8224 overnight. NZD/USD jumped 0.99% to 0.7731, while USD/CAD was down 0.50% to 1.1422 after rising to more than five year highs of 1.1501 earlier.
The U.S. dollar index, which measures the greenback against a basket of six major currencies, was down 0.90% to 88.39. On Monday the index rose to a five year high of 89.53.