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Wednesday November 12, 2008 - 21:24:35 GMT
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FOREX NEWS-Yen rallies as stocks sell off; pound tumbles

Wed Nov 12, 2008 4:11pm EST

* Yen soars across the board, dollar/yen falls below 95

* Treasury's Paulson backs off plan to buy toxic assets

* U.S. stocks tumble 5 percent after Paulson's comments

* Sterling hits 6-1/2-yr low vs dollar, record low vs euro

* For up-to-the-minute market news, click on FXNews (Recasts, adds quotes, changes byline)

By Vivianne Rodrigues

NEW YORK, Nov 12 (Reuters) - The U.S. dollar tumbled against the yen on Wednesday as investors shunned risky assets after comments by U.S. Treasury Secretary Henry Paulson heightened concerns about the economy and sparked a global sell-off in equities.

Sterling plunged to its lowest in more than six years versus the greenback and hit a record low against the euro after the Bank of England warned the British economy will shrink sharply next year. BoE Governor Mervyn King also bolstered expectations of further aggressive interest rate cuts.

"The yen has gotten significantly stronger because global equity markets are again under pressure. It's a similar trend to what we've been seeing over the past month. It's really a flight to quality," said Matt Esteve, a forex trader at Tempus Consulting in Washington. "As the markets go down, you'll see the yen continue to strengthen."

U.S. stocks .DJI extended losses to end around 5 percent lower after Paulson said he was backing away from buying troubled mortgage assets using the government's $700 billion bailout fund. "This is not the most effective way to use TARP funds," he told a news conference, referring to the Troubled Asset Relief Program. See [ID:nWEQ000369].

Paulson's comments compounded worries about the global economy, which is facing tough times thanks to the worst financial crisis in decades. The dollar and yen have performed strongly in the current environment of extreme risk aversion.

"It looks like Paulson has realized asset prices must be allowed to clear," said Axel Merk, chief investment officer at Merk Investments in Palo Alto, California. "But while we agree that this is the right thing to do, it may be more of a reflection that his days at the Treasury are almost over."

"Right now, we need clarity. Markets do not function if the rules change every day," he added.

In late New York trade, the dollar was last down 2.8 percent at 94.97 yen <JPY=>, after falling as low as 94.49 yen, the lowest since Oct. 28, according to Reuters data.

The yen also soared versus the euro, the pound and the Australian and New Zealand dollars as investors exited high-yielding, riskier currencies. The euro fell 2.9 percent to 118.72 yen <EURJPY=> after hitting 118.10.

STERLING STUNG

Sterling <GBP=> dropped almost 3 percent against the dollar to $1.4942, according to Reuters data, its weakest since 2002, after the BoE's King said the bank was prepared to cut rates even more after a stunning 1.5 percentage-point cut last week.

A quarterly BoE report predicted the UK economy will shrink sharply next year and inflation may fall below 1 percent. [ID:nBOE001620].

Ashraf Laidi, chief FX strategist at CMC Markets U.S., said the selling pressure on sterling was also exacerbated by reports showing unemployment hit a 16-year high and average earnings growth was the weakest in five years.

"If buying the yen was seen as the path of least resistance, then selling the pound has been the more popular trade," he said.

Sterling also fell 2.8 percent against the euro, hitting a record low of 84.11 pence <EURGBP=>, according to Reuters data.

The euro <EUR=> fell to a two-week low at $1.2469 against the dollar before rebounding, and last traded down 0.2 percent at $1.2487. Analysts said the currency remained under pressure after data showed euro zone industrial production fell more than expected in September. [ID:nLC724790].

Overall, rising risk aversion, a generally weaker tone in equities and global recession fears will likely continue to benefit the greenback, analysts said.

"I continue to look for ... an overall risk-averse theme to be the dominant one," said Dustin Reid, senior currency strategist at RBS Global Banking & Markets in Chicago. "As such, I have a difficult time seeing a material U.S. dollar decline from here." (Additional reporting by Wanfeng Zhou; Editing by James Dalgleish)

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