Dollar sheds US1.5c on Japan fears

THE dollar has dropped almost US1.5c today, as fears over a Japanese nuclear disaster escalate.

THE dollar has dropped almost US1.5c today, as fears over a Japanese nuclear disaster escalate.

At midday (AEDT), the dollar was trading at US97.97c, down from yesterday's local close of US99.46c.

Since 7am, it traded between a low of US97.09c and a high of US98.09c.

The benchmark Nikkei index today fell 398.83 points, or 4.39 per cent, to 8694.89 in the first 25 minutes of trading as jittery investors again offloaded shares amid fears about the unfolding crisis at the Fukushima No.1 nuclear plant.

The VIX index, which is a measure of volatility and risk aversion, hit 29.4 - its highest since July last year, during heightened concerns that European countries would default on their debt.

"Normally when the VIX spikes up, the dollar becomes vulnerable and sells off," St George senior economist Kate King said.

The Australian dollar had also sold off on speculation that Japan may soon start to liquidate its assets to aid rebuilding efforts, Ms King said.

"In total, Japan has around $50 billion in Australian assets.

"They're speculating that they will offload those and repatriate their funds back to Japan ... not only from Australia but globally for their rebuilding efforts."

Investors would likely stayed focus on events out of Japan for the rest of the local session, she said.

"It's Japan, Japan, Japan for the markets.

"The European debt story and what's happening in the Middle East is basically put into the background."

Meanwhile, the local bond market was higher.

At midday on the ASX 24, the June three-year bond futures contract price was 95.130 (implying a yield of 4.870 per cent), up from yesterday's close of 95.050 (4.950 per cent).

The June 10-year bond futures contract price was 94.650 (5.350 per cent), up from its previous close of 94.580 (5.420 per cent).

Nomura Australia chief economist Stephen Roberts said the overnight session was dominated by safe-haven buying following confusion about the state of some Japanese nuclear reactors.

"There was a strong safe haven bid off conflicting stories having to do with the nuclear power plants in Japan," he said.