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Tuesday September 16, 2008 - 11:19:04 GMT
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FOREX NEWS-Dlr near 4-mth lows vs yen, high yielders pressured

Tue Sep 16, 2008 7:05am EDT

* Dlr near 4-mth low vs yen <JPY=>, gains on high-yielders

* Risk aversion dominates in wake of Lehman collapse

* Potential Fed rate cut eyed later as o/n dlr rates soar

* Stock markets under pressure

(Updates prices, adds quotes, changes byline)

By Ian Chua

LONDON, Sept 16 (Reuters) - The dollar steadied near 4-month lows versus the yen on Tuesday, but held gains against high yielders as investors took refuge in safe-haven assets following the collapse of Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz).

Worries that the fallout from Lehman would claim other victims underpinned flight-to-safety flows, sending government bonds higher and stocks lower and making banks reluctant to lend to one another.

Analysts said that, despite much of the bad news originating in the U.S., the dollar was benefitting from the spreading financial jitters as investors became increasingly keen to convert to cash for safety.

(For stories on Lehman Brothers, see [LEHMAN/]).

"The negative news coming from the U.S., which is resulting in global asset market volatility, is actually proving to be a bit of a supportive factor for the dollar given that it's triggering repatriation flows back into U.S. dollars," said Ian Stannard, senior foreign exchange strategist at BNP Paribas.

"So from that perspective, the dollar will remain well supported. But there is still further downside potential for dollar/yen; position unwinding is going to provide the yen support over the medium term."

Trading was extremely choppy ahead of the outcome of the Federal Reserve's policy meeting at 1815 GMT, made worse by illiquidity in money markets as the interbank cost of borrowing overnight dollar funds soared to above 10 percent.

The high rates have a direct impact, particularly on speculative plays, as they makes it expensive to take positions in the spot currency markets.

"The driving force here is still risk reduction," said Simon Derrick, head of currency research at Bank of New York Mellon.

"In the grand scheme of things, the two great funding currencies of the past six or seven years have been the dollar and the yen and so it's no surprise to me it should be those two currencies that continue to benefit."

At 1049 GMT, the dollar was 0.4 percent lower at 104.07 yen <JPY=>, having earlier slipped to its lowest since May at 103.62 yen, while the euro fell 1.05 percent to 147.69 yen <EURJPY=>. On Monday, the yen posted its biggest daily percentage gain versus the dollar since 1998.

Yen crosses were also hit, with the Australian dollar sinking to its lowest since June 2005 <AUDJPY=> at 81.45 yen, while the New Zealand dollar hit its lowest since late 2003 <NZDJPY=>.

The euro slipped 0.5 percent to $1.4187 <EUR=>, well off the session peak of about $1.4479 struck on Monday.

Risk-averse investors also sent the Aussie and Kiwi down 2 and 1.1 percent respectively against the U.S. dollar <AUD=> <NZD=>.

Fears about the banking sector overshadowed economic data, which took a backseat for a second session. Figures earlier showed German investor sentiment improved by more than expected in September, albeit off a low base, while euro zone inflation slowed in August from July peaks.


Futures markets are pricing in a 94 percent chance of a 25 basis point cut from the current 2 percent Fed funds rate when the central bank gives its verdict, but speculation is building on the possibility of a bigger 50 basis point cut.

"(The) financial market turmoil suggests the Fed will cut rates today. Our U.S. economics team expects Fed funds will be reduced by 50 basis points to 1.50 percent," said UBS in a note.

With troubles also abounding at insurance giant AIG (AIG.N: Quote, Profile, Research, Stock Buzz), the VIX equity market volatility, or 'fear', index soared to 31.87 percent on Monday, its highest in 6 months.

Market sources said dollar lending between banks had virtually ceased, and traders and analysts said central banks needed to provide more liquidity.

"European banks can't get dollars. Banks are hoarding (cash) in case of payment issues," related to the collapse of Lehman Brothers, one market source said.

"We need the ECB and SNB to start providing more dollars," he added.

The European Central Bank pumped 70 billion euros into money markets while the Bank of England offered 20 billion sterling in an exceptional fine-tuning operation. (Reporting by Ian Chua and Veronica Brown; editing by John Stonestreet)

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