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Thursday October 16, 2008 - 21:09:05 GMT
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FOREX NEWS-Dollar gains vs yen as U.S. stocks surge

 

Thu Oct 16, 2008 4:56pm EDT

* Dollar gains against yen as U.S. stocks surge

* Philly Fed index, U.S. industrial output plunge

* Money market jitters ease (Recasts; updates prices, adds comment, changes byline)

By Gertrude Chavez-Dreyfuss

NEW YORK, Oct 16 (Reuters) - The dollar had its best day against the yen in seven months in choppy trading on Thursday, boosted by sharp gains in U.S. stocks as risk aversion waned amid a stream of measures to help ease a global credit crisis.

Higher-yielding currencies such as the Australian and New Zealand dollars, which have been pummeled as the financial stress worsened in recent sessions, also gained, with improving money market conditions helping support both units.

"It's the same story, different day. When you see the stock market rise, you see the yen and Swiss franc fall and it's all about deleveraging and not because they're safe bets," said Joe Francomano, vice president of foreign exchange trading at Erste Bank in New York.

"But the overall beneficiary to all these is still the dollar. Even though we see gains in the stock market, there is still no confidence and liquidity is tight."

Over the last few months, the greenback has benefited from buying of safe-haven U.S. Treasuries or highly liquid dollar instruments by nervous investors worried about a global meltdown. These investors have assumed that the United States is still the safest place in times of distress given the way the government has aggressively tackled the credit crisis.

In late trading, the dollar rose 2.0 percent against the low yielding yen to 101.67 <JPY=>, its largest one-day gain since March. The yen tends to rise in times of increased risk aversion as investors unwound risky carry trades funded using the Japanese currency's low interest rates to buy assets in higher-yielding units.

The euro also gained versus the yen, rising 1.8 percent to 136.71 <EURJPY=>.

The dollar held its own against the euro despite unsettling news out of the United States on Thursday when data showed mid-Atlantic regional factory activity plunged to an 18-year low while overall U.S. industrial output posted its biggest monthly slide since 1974. For more see [ID:nN16468289]. The euro was down slightly at $1.3445 <EUR=>.

IT'S NOT ABOUT THE DATA

U.S. economic reports, however, are for now taking a back seat to the global credit crisis.

Erste's Francomano said the dollar gained despite a steep slide in the Philadelphia Federal Reserve's factory survey index. "The focus is not on economic fundamentals and as to when the market will pay attention to the data again, that's the trillion-dollar question," the Erste trader said. "I think the economy will be the focus again once we hit a bottom in U.S. equities but I don't see that happening just yet."

In another volatile trading day, U.S. stocks closed sharply higher but not after going through several peaks and valleys all throughout the session. But Thursday's upward trend in stocks helped elevate the dollar against the yen.

In the money market, most interbank loan rates fell amid more drastic steps by central banks to provide funds, improve bank balance sheets, and free up credit lines to cash-strapped firms. Sizable declines were seen in dollar and sterling Libor at the short end from overnight to two weeks.

Overall, however, the cost of funding was still prohibitive. The Libor premium over anticipated policy rates -- a key gauge of financial market dislocation -- rose as growing fears of recession affirmed expectations of interest rate cuts from central banks worldwide.

Still, the generally positive mood in the money market has helped improve risk appetite, underpinning the Australian and New Zealand dollars. The Aussie surged 5.9 percent to US$0.6895 <AUD=>, while the Kiwi dollar rose 3.4 percent to US$0.6173 <NZD=>.

Sterling also gained versus the U.S. dollar, rising 0.8 percent to $1.7324 <GBP=>, boosted partly by a Bank of England move that makes it easier for British financial firms to borrow from the central bank.

Analysts at Wells Fargo in New York believe that calmer market conditions "would lessen the need for extreme dollar hoarding that has dominated the FX market." The bank's bias is for a softness in the dollar in the weeks ahead, they said in a research note. (Additional reporting by Steven C. Johnson; Editing by James Dalgleish)

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