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Friday December 12, 2008 - 13:06:12 GMT
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FOREX NEWS-U.S. bailout failure pushes dlr/yen to 13-yr low

Fri Dec 12, 2008 7:41am EST

* Dlr hits 13-yr low 88.1 yen, U.S. Senate rejects bailout

* Yen gains broadly on risk aversion, stocks tumble

* Deleveraging, risk aversion supports dlr vs other FX

(Changes byline, adds comment, updates throughout)

By Naomi Tajitsu

LONDON, Dec 12 (Reuters) - The dollar dived to a 13-year low against the yen on Friday after the U.S. Senate failed to agree a bailout for U.S. automakers, cranking up risk aversion and triggering demand for the low-yielding yen.

That same deleveraging, sharp decline in stocks and hefty emerging market selloff, however, supported the dollar against most other currencies, lifting it up from a seven-week low against the euro.

U.S. talks on a $14 billion rescue package for the stricken sector collapsed late on Thursday, exacerbating global recession fears and prompting an exodus from risky assets such as equities and emerging markets [nLC326248].

The dollar tumbled to 88.1 yen <JPY=> according to electronic trading platform EBS, but trimmed losses as the pair's break through the closely watched 90 yen region had spurred some speculation that Japanese authorities may consider acting to stem further yen strength.

Analysts said that demand to pull out of risky positions remained high, which battered higher-yielding currencies like the Australian and New Zealand dollars against the yen. They added that the yen would remain a big beneficiary of such moves.

"The risk aversion trade is the most powerful force these days, and this has led to a drastic unwind in carry trade and repatriation flows back into Japan," said Marco Annunziata, global chief economist at UniCredit in London.

"This will continue, at least in the short term."

At 1148 GMT the dollar <JPY=> traded 1.5 percent lower on the day at 90.33 yen.

The euro <EURJPY=R> fell 1.7 percent to 119.95 yen, while the Australian dollar tumbled 3.7 percent to 59.08 yen and the New Zealand currency <NZDJPY=R> fell to 48.15 yen, closing in on a seven-year low hit earlier in the month.

The euro <EUR=> stumbled 0.3 percent to $1.3325, while sterling <GBP=> traded 0.7 percent lower at $1.4925. The Australian and New Zealand currencies also fell against the dollar.

But dollar gains against those currencies were limited as some in the market speculate that repatriation flows in the U.S. currency may be drying up, while traders take profits on the dollar's dramatic gains in recent months.

Earlier in the day, the euro matched a seven-week high of $1.3407 on EBS. It has gained 4.5 percent on the dollar this week, putting it on track for its biggest percentage gain since the single currency was introduced in 1999.

Against a basket of currencies .DXY, the dollar is set for its worst weekly performance since 1995, last down 3.6 percent on the week.

INTERVENTION SPECULATION

The yen's jump on Friday increased speculation that Japanese authorities may consider capping yen strength -- which hurts the nation's export sector, a big driver of the economy.

But Japanese Finance Minister Shoichi Nakagawa told reporters after the yen's rally that he was not considering such a possibility, while also noting that he was watching currency markets with great interest and that big movements were undesirable [nTKF003208].

Market participants question the success of any intervention, with many analysts speculating that Japan would have to conduct yen-selling operations on its own, without the help of other countries, given a wide trend of broad yen strength.

"The chances of success of intervention will be limited against the background of still high risk aversion, but this will not stop Japanese officials from likely stepping up their rhetoric over coming days," Calyon analysts said in a research note.

Traders awaited U.S. data due out later in the day, which includes November producer prices and retail sales.

Weak readings may further increase speculation of a big interest rate cut by the Federal Reserve next week. Fed funds rates futures are pricing in an 84 percent probability the central bank will cut its 1.0 percent target rate by 75 basis points to 0.25 percent. (Reporting by Naomi Tajitsu)

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