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Thursday October 30, 2008 - 10:23:53 GMT
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FOREX NEWS-Dollar slides, Fed cut quells some risk aversion

Thu Oct 30, 2008 5:37am EDT

* Dollar slides, Fed rate cuts cool some risk aversion

* Higher-yielding currencies gain, yen slides

* Investors await data on EZ sentiment, U.S. GDP

(Changes dateline, byline, releads, adds comment, updates throughout)

By Naomi Tajitsu

LONDON, Oct 30 (Reuters) - The dollar fell against the euro, sterling, and other high-yielding currencies on Thursday after an interest rate cut by the Federal Reserve helped to cool extreme risk aversion and supported European shares.

In a widely expected move, the U.S. central bank chopped rates by 50 basis points to 1 percent, and left the door open for more easing by saying that downside risks to growth remain [ID:nN29457174].

Separately, it also approved currency swap lines with central banks in emerging countries, making dollars available to help them deal with the credit crunch, which provided a boost to currencies with higher yields that are seen as being high-risk.

"The Fed's statement has paved the way for further rate cuts ... Its policy outlook is softer, and is pushing the dollar lower," said David Tinsley, economist at nabCapital.

He also said that the additional swap lines boosted emerging currencies against the dollar as the move indicated that the central bank was doing its part to shore up emerging economies.

By 0903 GMT, the euro <EUR=> rose 1.3 percent to $1.3125 in volatile trade, pulling further away from a 2 1/2-year low of $1.2329 hit earlier in the week on electronic trading platform EBS.

European shares rose 0.5 percent in early trade, taking a cue from dramatic gains in shares in Asia, where Japan's Nikkei stocks average .N225 surged 10 percent.

Higher share prices were considered a sign that some investors may be starting to creep back into riskier assets after a meltdown in the banking sector triggered waves of selling in past weeks.

Sterling <GBP=> rose roughly a percent against the dollar to $1.6564, while the Australian <AUD=> and New Zealand <NZD=> currencies each rose as much as roughly 2 percent in early London trade.

Despite its broad losses, the dollar <JPY=> climbed a percent to 98.40 yen, extending its recovery from a 13-year trough of 90.87 yen touched on EBS late last week.

YEN SLIDES

Slightly diminishing risk aversion stung the yen and boosted the euro <EURJPY=R> and Australian <AUDJPY=R> and New Zealand <NZDJPY=R> dollars up nearly 3 percent each at one point.

Those currencies were boosted as investors slowed their stampede to unwind carry trades, which used the low-yield Japanese currency to buy assets in higher-yielding ones.

Speculation is brewing that Japan's already low 0.5 percent lending rate may sink even lower, with market participants acknowledging the possibility that the Bank of Japan may cut rates on Friday.

Japan's government on Thursday unveiled a plan worth a total of 26.9 trillion yen ($277.3 billion) to help stimulate the economy, which included 5 trillion yen in spending and an expansion of its bank bailout scheme. [ID:nTKF003128]

Analysts said that market movements remained wildly volatile as investors attempted to price in a global recession while bracing for more fallout from the ongoing turmoil in the financial system, which has brought interbank lending to a halt.

Market participants said that trading in currencies would remain choppy on Thursday when a reading of euro zone consumer sentiment and the business climate for October are released. A weak reading could cut into the euro's gains, analysts said.

At the same time, a weaker-than-expected reading of third-quarter U.S. economic growth due later in the day may prompt more dollar selling. Expectations are for a 0.5 drop in growth following a 2.8 percent increase in the second quarter.

Markets showed limited initial reaction to a bigger-than-expected fall in German unemployment for this month, as it did little to change the view that the nation's economy is slowing [ID:nBAE001446].

(Reporting by Naomi Tajitsu; Editing by Andy Bruce)

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