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Tuesday October 28, 2008 - 10:31:16 GMT
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FOREX NEWS-Yen retreats broadly, risk aversion abates

Tue Oct 28, 2008 6:24am EDT

* Yen slides as share price rebound spurs short-covering

* Nikkei jumps 6.4 pct from 26-yr low, European stocks rise

* Investors still nervous, further yen gains eyed

* RBA intervenes to prop up Aussie for third day

(Changes dateline, byline, adds quotes, update prices)

By Veronica Brown

LONDON, Oct 28 (Reuters) - The yen backed away from recent 13-year highs against the dollar on Tuesday as rebounding stock markets and the threat of official intervention halted the Japanese currency's broad surge.

Japan's Nikkei share average .N225 jumped 6.4 percent from a 26-year low as investor bets on falling share prices were restricted, lighting a fire under the euro and Australian dollar, two of the currencies most battered against the yen.

World stock markets as measured by MSCI's all-country index .MIWD00000PUS rose 1.5 percent, helping to take some out of extreme risk aversion.

But the respite for stock markets and the yen's fall were seen as a temporary pause from recent price action as the spectre of a prolonged global recession was expected to keep investors in risk averse mode.

"I think what we've seen this morning will be rather fleeting in terms of its impact. There's no sense that the underlying trend of dollar strength and yen strength is set to change," said Daragh Maher, deputy head of Calyon global foreign exchange research in London.

The Nikkei's plunge and yen's big gains this month have reinforced each other, with falling share prices prompting a stampede towards the Japanese currency.

Distressed stock market prices and the yen's rise succeeded in getting Group of Seven economic powers to warn against excessive yen volatility on Monday, a move seen as opening the way for Japanese officials to intervene if necessary.

By 1006 GMT, the dollar had jumped 2 percent from late U.S. trade to 94.69 yen <JPY=>, moving away from a 13-year low of 90.90 yen struck on Friday, according to Reuters data.

The euro was up 2.2 percent at 118.30 yen <EURJPY=R>, having earlier topped 120 yen. The euro struck a 6-1/2 year low of 113.61 yen on Monday.

The euro rose 0.2 percent on the day to $1.2485 <EUR=>, after earlier hitting a 2-1/2-year low. European Central Bank President Jean-Claude Trichet on Monday said the bank could cut rates at its policy meeting next week. [ID:nLR566958]


While the prospect of intervention remained as a real threat, many in the market were doubtful that intervention would be effective enough to change the current trend for yen buying unless it was internationally coordinated.

French Economy Minister Christine Lagarde said on Monday any intervention on the yen would be a purely Bank of Japan undertaking. [ID:nPAB004453]

Traders said the yen is likely to test a 13-year peak against the dollar sooner or later if Japanese investors, who still have lots of overseas assets, decide to dump them and repatriate their proceeds.

"Market participants, including players of yen carry trades, hedge funds and Japanese individual investors, continue to trim their assets as Japanese stocks have fallen so much," said Hideki Hayashi, chief economist at Shinko Securities.

And despite Tuesday's gains, the Nikkei has lost more than half its value this year.

Trichet's comments about a possible rate cut next week surprised the market and investors are now speculating about the the size of a move. Earlier this month, the ECB cut rates by 50 basis points together with other central banks including the Federal Reserve.

The Fed is also seen cutting rates at its two-day meeting starting on Tuesday. Many in the market expect the Fed to slash the fed funds rate -- currently at 1.50 percent -- by at least 50 basis points. FEDWATCH

The Australian dollar climbed 3 percent against the U.S. dollar to $0.6230 in Asian trade after the Reserve Bank of Australia intervened to prop up the Australian currency. [ID:nSYD72525]

It was the third straight day that the central bank entered the market to help the Australian dollar, which has lost more than 35 percent against the U.S. dollar since peaking in July. (Reporting by Veronica Brown; Editing by Andy Bruce)

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