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Thursday December 20, 2007 - 22:07:09 GMT
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FOREX NEWS-Credit worries spark yen buying, dollar up vs euro

Thu Dec 20, 2007 4:43pm EST

(Adds comment, updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, Dec 20 (Reuters) - The yen advanced on Thursday, buoyed by the view that the U.S. economy has yet to see the worst of the subprime mortgage crisis after investment bank Bear Stearns reported its first-ever quarterly loss.

An unexpected fall in a U.S. Mid-Atlantic manufacturing activity index also weighed on the market already pressured by a persistent credit crunch. That prompted investors to shun risky carry trades as they bought the yen and sold higher-yielding currencies.

Concerns that the credit fallout was spreading to other market segments mounted late Wednesday, with Standard & Poor's revising its outlook downward for major bond insurers Ambac Financial Group, MBIA Insurance Corp and XL Capital Assurance.

"Yen strength is just about risk aversion and all the news such as (that of) MBIA and that's causing some pullback in carry trades," said Adam Fazio, currency strategist at CIBC World Markets in New York.

Earlier in the session, MBIA, the world's largest bond insurer, said it had exposure to $30.6 billion in complex mortgage securities that it ensures, an amount that exceeds its entire net worth.

In late trading, the dollar fell 0.3 percent to 113.05 yen <JPY=>. The euro dropped 0.7 percent to 161.90 yen <EURJPY=>.

The yen briefly extended gains against the dollar earlier after the Philadelphia Federal Reserve's index of regional manufacturing fell sharply to its lowest since April 2003.

Gains in the yen kicked off after Bear Stearns (BSC.N: Quote, Profile, Research) reported the first quarterly loss in the company's history of $854 million, and took a write-down of $1.9 billion in the quarter ended November.

Low-yielding currencies such as the yen tend to attract flows during periods of uncertainty as their low interest rates reflect the capital surplus of their respective countries.

The yen also shrugged off the Bank of Japan's decision to leave interest rates on hold and the downgrade of the country's economic outlook. It also got a lift from a Chinese rate hike.

The euro, meanwhile, slipped 0.4 percent to $1.4319 <EUR=>, hurt by continued position adjustment and some repatriation of funds as the year winds down. Earlier, the euro fell to a two-month low at $1.4310.

"We're seeing dollar strength against the euro and that's flows-related, with CTAs (commodity trading advisors) and model accounts taking profits going into the year-end. I think euro/dollar could fall to $1.40-$1.42 and $1.40 a big psychological level," said CIBC's Fazio.

The greenback also hit four-month highs against sterling, having broken below the key $2 mark the previous session after minutes from a Bank of England meeting suggested it may cut rates again as soon as January.

In contrast, expectations of Federal Reserve rate cuts next year have been slightly scaled down in the wake of last week's unexpectedly strong U.S. economic data.

Sterling fell to a four-month low of $1.9810 <GBP=> and was last trading at $1.9825, down 0.7 percent on the day. The euro rose 0.3 percent to 72.20 pence <EURGBP=>, close to a 4-1/2-year high above 72.40 pence.

On Friday, markets will focus on the release of the Fed's favored gauge of inflation -- the core personal consumption expenditures. Markets are expecting a 0.2 percent rise in core PCE last month.

"Although credit concerns are currently overshadowing most data releases, a higher-than-expected print could cast some doubt over the amount of additional easing by the Fed, a move that could provide further support to the dollar," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto. (Additional reporting by Lucia Mutikani; editing by Gary Crosse)

© Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.


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