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Friday January 11, 2008 - 19:11:38 GMT
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FOREX NEWS-Yen, Swiss franc advance on credit writedown fears

Fri Jan 11, 2008 2:00pm EST

(Adds details, updates prices, changes byline)

By Lucia Mutikani

NEW YORK, Jan 11 (Reuters) - The yen rose across the board on Friday as global equity markets sagged on renewed fears of further subprime mortgage-related writedowns in the U.S. financial sector, reducing investors' appetite for risk.

A New York Times report that Merrill Lynch (MER.N: Quote, Profile, Research) was expected to suffer $15 billion in losses from soured mortgage investments left investors reluctant to hold relatively risky carry trades in which cheap borrowing in the yen and Swiss franc funds purchases of high-yielding currencies.

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

"The general theme is towards risk aversion, we will see the yen and the Swiss franc outperform. There is still a fair bit of financial market anxiety out there," said Shaun Osborne, chief currency strategist at TD Securities in Toronto.

"The news on Merrill Lynch suggests to people that we haven't found the bottom yet (from the subprime mortgage fallout)."

In afternoon New York trade, the dollar was down 0.4 percent at 108.88 yen <JPY=>, after dipping to a session low of 108.64 yen. The euro traded down 0.6 percent at 161.07 yen <EURJPY=>, recovering from an intraday low of 160.65 yen.

The Swiss franc rallied to 1-1/2-month highs versus the dollar <CHF=> and the highest since late August against the euro <EURCHF=>, though it subsequently retreated a little. The dollar was last down 0.2 percent at 1.1008 Swiss francs, while the euro fell 0.3 percent to 1.6284 Swiss francs.

U.S. stocks fell sharply, while European shares were also down, with investors convinced that the worst from the U.S. subprime crisis was yet to come. The yen at times has been tightly correlated to equity markets as investors tend to price their risk perceptions in those markets.

"Obviously, there is still considerable concern and worry in the market about the extent of subprime mortgage exposure by U.S. financials. The news on Merrill Lynch showed there is still continued distress in this sector," Greg Salvaggio, senior vice president of capital markets at Tempus Consulting in Washington.

The dollar regained some of its poise against the euro after Thursday's tumble following Federal Reserve Chairman Ben Bernanke's blunt comments on the economy that suggested an aggressive half-percentage point interest rate cut at its Jan. 29-30 policy meeting.

The euro was down 0.1 percent at $1.4793 <EUR=>.

The rate futures market now reflects expectations of a half-point cut in the overnight target fed funds rate to 3.75 percent, and also a 38 percent chance the Fed could lower rates by three quarters of a point.

The euro, meanwhile, rose to a record high versus sterling <EURGBP=> at 75.86 pence. It last traded at 75.59 pence, up 0.2 percent on the day.

Sterling dipped below $1.95 to a 10-month low against the dollar <GBP=> as weak industrial output data confirmed investor expectations that the Bank of England would cut rates next month after leaving them at 5.50 percent on Thursday.

The pound was last at $1.9562, down 0.3 percent. (Additional reporting by Gertrude Chavez-Dreyfuss; Editing by James Dalgleish)

© 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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