SYDNEY (Reuters) - The yen hovered at two-month highs against the euro and dollar early on Tuesday, having powered higher as a selloff in risk assets forced investors to cover bearish positions in the low-yielding Japanese currency.
Disappointing U.S. data that showed manufacturing activity slowed sharply last month dealt a heavy blow to markets already jittery about a selloff in emerging markets.
"A poor ISM manufacturing print exacerbated growth fears and further directs attention to the non-farm (U.S.) payrolls due at the end of this week, after the December release's dismal showing," analysts at JPMorgan wrote in a note to clients.
As Wall Street's benchmark stock indexes suffered falls of over 2 percent, the dollar skidded to 100.77 yen, while the euro slumped to 136.37 yen, both touching lows not seen since late November. .N The dollar last stood at 101.03 yen, while the euro was at 136.64.
Safe-haven flows to Treasuries dragged down U.S. 10-year note yields by a sharp 10 basis points to 2.57 percent, further undermining the U.S. dollar's yield advantage.
Sterling fell an eye-catching 1.8 percent against the yen to 164.26, further weighed by profit-taking after a survey showed British factory activity eased slightly in January.
Just last month, the pound was flying at five-year highs against the yen. It also hit a 2-1/2-year peak on the U.S. dollar, fuelled by optimism the UK economy was recovering well.
Traders said the selloff last night encouraged investors to take aim at high-flying currencies.
Against other major currencies, the U.S. dollar was mixed. It slipped on the euro, but firmed against sterling and was little changed versus the Canadian and Australian dollars.
The Aussie last traded at $0.8752, having retreated from a two-week peak of $0.8834. Its immediate fortunes depend on the outcome of the Reserve Bank of Australia policy review due at 0330 GMT.
Analysts polled by Reuters were unanimous in expecting no change in the 2.5 percent cash rate although some expect the RBA could drop its easing bias.
"That may lead rate markets to reconsider pricing in a future rate hike," analysts at BNP Paribas said.
Debt and swap markets are giving a mere 4 percent chance for a quarter-percentage-point cut and have 4 basis points of hikes priced in over a 12-month period.
Investors also want to see if the RBA reiterates that the local dollar is still "uncomfortably high", or whether the latest fall in the currency has brought it more in line with the bank's wishes.
Editing by G Crosse