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Monday October 27, 2008 - 21:05:49 GMT
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FOREX NEWS-US dollar, yen uptrend intact as risky assets shunned

Mon Oct 27, 2008 3:54pm EDT

* Yen near 13-year peaks vs dollar despite G7 warning

* Dollar gains vs euro, sterling

* Markets on alert for BoJ intervention (Updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, Oct 27 (Reuters) - The dollar and yen advanced on Monday as fears of global recession prompted investors to abandon risky assets, boosting both currencies that were sold to finance these investments.

The yen hovered near 13-year peaks against the dollar and rose to its highest since 2002 versus the euro, despite a statement from the Group of Seven finance officials expressing concern about excessive volatility in the Japanese currency. The dollar climbed to its strongest level against the single euro zone currency in about 2-1/2 years.

The G7 major industrialized nations said they would continue to monitor markets closely, and cooperate as appropriate, raising prospects for a coordinated currency intervention. For more see [ID:nSP96492].

"The whole deleveraging dynamic playing out is accompanied by a reversal in carry trades," said Jack Crooks, president of Black Swan Capital in Palm City, Florida.

"Both the dollar and the yen, which sport the two lowest yields among major currencies, are the biggest beneficiaries of global capital flows right now. Jumping in front of (these two) is like jumping in front of a freight train -- it simply doesn't stop."

The yen, which has risen roughly 20 percent on a trade-weighted basis .IBOXXFXJPY this month, has gained as investors unwound carry trades, which used the low-yielding yen to buy everything from higher-yielding currencies to stocks and commodities. These trades have collapsed in recent weeks as market players have been forced to sell assets to raise cash.

The dollar was also a beneficiary of global deleveraging. Investors had used dollar-denominated loans to pump up investments elsewhere. When the crisis escalated over the summer, borrowers began calling in these loans, resulting in a scramble for dollars.

In late afternoon New York trading, the dollar <JPY=> was hovering around 94.00 yen, pulling back after rising to about 94.48 yen after the G7 warning. On Friday, the U.S. currency had slid to a 13-year low of 90.95, according to electronic trading platform EBS.


The euro rebounded somewhat to 117.68 yen as U.S. stocks repaired morning weakness, after it hit a 6-1/2-year low of 113.62 <EURJPY=> during earlier trade, EBS data show.

Traders said the G7 warning has fallen on deaf ears, as investors continued to snap up the Japanese currency while the Nikkei stock index .N225 plunged over 6 percent.

French Finance Minister Christine Lagarde said on Monday any intervention on the yen will be a purely Bank of Japan undertaking. For details, see [ID:nPAB004453].

"Chances of a successful yen-selling intervention are weak as long as the currency remains boosted by capital (returning) to the yen," said Ashraf Laidi, chief currency strategist at CMC Markets USA in New York.

He added that intervention would also be futile as Japanese investors, who in the past had embarked on foreign equity buying, have turned risk averse, with the 26-year low in the Nikkei wiping out much of their wealth.

Against the dollar, the euro was also a little firmer in afternoon trade around $1.2544. Earlier, it fell to a 2-1/2-year low at $1.2335 <EUR=>. The euro had been hurt by comments from European Central Bank President Jean-Claude Trichet saying the bank could cut rates at its next meeting on Nov. 6. See [ID:nFAE002606]. The ECB has cut rates by 50 basis points together with other central banks early this month.

The Reserve Bank of Australia intervened in the currency market buying Aussie dollars and selling the greenback in Europe on Monday, traders said. [ID:nLR483412]. It also confirmed it had intervened on Friday and in Asian trade earlier in the global session to stabilize the flagging Australian currency.

The Australian dollar fell to a 6-1/2-year low at US$0.6025, according to Reuters data. It was last at US$0.6090 <AUD=>. Against the yen, the Aussie was at 57.23 yen <AUDJPY=R> after sinking to 55.11 yen on Friday, the lowest since it was allowed to trade freely in December 1983. (Editing by Toni Reinhold)

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