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Tuesday September 9, 2008 - 20:35:26 GMT
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FOREX NEWS - US dollar slides vs yen; Lehman re-ignites credit woes

Tue Sep 9, 2008 4:21pm EDT

* Fall in Lehman Brothers shares weighs on dollar

* Yen rises as risk aversion returns

* U.S. financial sector worries persist (Recasts, updates prices, adds comment, changes byline)

By Gertrude Chavez-Dreyfuss

NEW YORK, Sept 9 (Reuters) - The U.S. dollar slumped against the Japanese yen on Tuesday, as steep falls in Wall Street stocks led by Lehman Brothers rekindled worries about a shaky U.S. financial sector.

Shares in Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research, Stock Buzz), the fourth largest U.S. investment bank, tumbled on concerns over its ability to raise capital after reports that talks with a Korean bank on a possible capital infusion had ended.

Lehman's more-than-40 percent drop on Tuesday, its biggest one-day decline on record, eroded the market's initial optimism about the U.S. government's weekend takeover of mortgage financiers Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) and Fannie Mae <FNM.N.

That caused investors to back away from risky trades such as stocks, pushing the dollar lower against the low-yielding yen, which was used by investors to purchase these assets in carry trades.

"Overall, there is still risk aversion in the market. Investors keep going back and forth on whether the dollar should be a flight-to-quality trade or whether it should be something to be avoided," said Mark Frey, head trader at Custom House, a global payments dealer in Victoria, British Columbia.

In late trading, the dollar dropped to a session low against the yen at 106.84 <JPY=>. It last traded at 107.07, down 1.2 percent on the day. The yen also surged against the euro, pushing the single currency down more than 1 percent at 151.22 yen <JPY=>.

Analysts said there were fears that Lehman, the country's fourth largest investment bank, could follow in the footsteps of Bear Stearns, whose takeover was engineered by the U.S. Treasury and the Federal Reserve in March. Lehman declined to comment on its plunging share price.

Compounding matters for Lehman was a statement from Standard & Poor's on Tuesday saying it might downgrade the bank's credit ratings due to heightened uncertainty about the firm's ability to raise additional capital given the recent steep decline in its share price.

"If the risk aversion theme continues and we see reports along the lines that we have been seeing for the last couple of days in the equity market, then we could see the dollar fall further. From a North American perspective, things are just not getting rosy on the risk front," said Frey of Custom House.

WHO'S NEXT AFTER FANNIE AND FREDDIE?

Analysts have also taken a more critical stance of Sunday's bailout of Fannie and Freddie and wondered who's next in line for a takeover after the two distressed mortgage finance giants.

"Capital markets are still broken after Sunday's historic, if only temporary, takeover of two of the largest publicly traded firms in U.S. history," said David Gilmore, a partner at FX Analytics in Essex, Connecticut.

"The takeover helps the mortgage market function with adequate financing and keeps GSE (government-sponsored enterprises) debt holders whole ... but it also is another signal of just how bad things have gotten," he added.

Analysts feared that if blue-chip banks, like Lehman Brothers, can't get capital in the private sector, then the Treasury may have to open its wallet again to keep them going. That could have pernicious consequences on the U.S. government's heavily burdened fiscal budget, possibly jeopardizing the country's "AAA" credit rating.

The dollar index .DXY on the ICE Futures Exchange, which measures the greenback's value against six major currencies, was flat at 79.535 in afternoon trading. On Monday, it touched a one-year peak at 79.844, according to Reuters data.

The euro was down 0.2 percent against the dollar at $1.4104 <EUR=>, still above a nearly 11-month low touched overnight. The euro earlier got a bid against the dollar after data showing U.S. pending home sales fell more than expected in July.

Sterling, meanwhile, the currency market's favorite whipping boy over the past month, shrugged off a report showing British manufacturing output fell for a fifth straight month in July. The pound was last up at $1.7594 <GBP=>. (Additional reporting by Lucia Mutikani; Editing by Jonathan Oatis)

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