By Sam Goldfarb

The dollar rose sharply against the yen for the second straight session Thursday, fueling discussion about a shift in currency markets.

The dollar climbed 0.7% against the yen to 112.11 yens per dollar, building off a 1.4% gain on Wednesday.

Though hard-pressed to explain the magnitude of its decline, analysts attributed the yen's weakness to several factors, including disappointing Japanese economic data and solid U.S. figures.

According to a report released early this week, Japan's economy contracted at an annualized rate of 6.3% in the October-December quarter. That was worse than economists' forecast of a 3.9% decline and raised the possibility that the world's third-largest economy could slip into a recession this quarter.

At the same time, U.S. economic reports -- including those on employment and manufacturing activity -- have largely been beating expectations. And many investors are concerned that Japan's economy could be particularly exposed to the coronavirus both because of its economic ties with China and the potential for the virus to spread in the country.

"Suddenly with very poor economic data and coronavirus fears, I think the market is looking at the possibility, or at least the risk, that you get a technical recession in Japan," said Brian Daingerfield, head of G10 FX Strategy for the U.S. at NatWest Markets, referring to the potential for two straight quarters of economic contraction. That in turn could push the Bank of Japan to adopt new stimulus measures, which could weigh on the yen, he added.

This week's move in the yen is noteworthy because the currency has, for many years, served as a haven for investors -- strengthening during times of political and economic uncertainty and weakening when optimism grows.

Some analysts, though, say they believe the dollar could challenge the yen as a haven. One reason is that the U.S. is relatively insulated from the rest of the world because exports account for a small share of its economic output. Another is that U.S. government bonds generally yield more than bonds in Europe and Japan, making them an attractive place for investors around the world to park their money.

The yen's declines on Wednesday were coupled with gains in riskier assets such as stocks. But its move on Thursday came despite selling in stocks and a rally in U.S. Treasurys, a departure from the usual pattern.

The yield on the benchmark 10-year U.S. Treasury note settled at 1.524%, according to Tradeweb, compared with 1.569% Wednesday. Yields fall when bond prices rise.

The WSJ Dollar Index, which tracks the dollar against a basket of 16 other currencies, rose 0.4% to 92.55, its highest closing level since January 2017.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

(END) Dow Jones Newswires

February 20, 2020 17:53 ET (22:53 GMT)

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