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Monday December 22, 2008 - 11:54:53 GMT
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FOREX NEWS-Euro gains vs dlr, yen in volatile holiday trade

Mon Dec 22, 2008 6:50am EST

* Euro gains broadly, trades around $1.40 <EUR=>

* Yen weakens in wake of Friday's BOJ rate cut

* Scepticism about U.S. auto bailout keeps dlr on back foot

* ECB policymakers divided on near-term policy action

(Adds comment, updates throughout)

By Naomi Tajitsu

LONDON, Dec 22 (Reuters) - The euro rose broadly in holiday thinned trade on Monday as a dim view of the U.S. economy kept the U.S. currency on the back foot, while the yen struggled in the wake of the latest Japanese interest rate cut.

The euro climbed in jerky trade, recovering from heavy losses against the dollar late last week as market participants were sceptical about whether a U.S. bailout plan for the nation's comatose automakers would help steer the economy out of a deep recession.

Traders said that volumes were razor-thin in the lead-up to the Christmas and year-end holiday season, which was aggravating even the slightest moves in the currency markets. Still, many in the market said that demand for dollars remained low. "The dollar view is so opaque at the moment, and the risk reward is at this time of year is not worth it unless you really have to trade," said Maurice Pomery, head of forex at IDEAglobal in London.

Traders said an announcement by China's central bank to lower banks' lending and deposit rates by 27 basis points -- its fifth rate cut since September -- had limited initial impact on currency markets [ID:nPEK256295]

By 1137 GMT, the euro rose 0.2 percent to $1.3951 <EUR=>. The pair recovered from a fall to as low as $1.3824 on electronic trading platform EBS on Friday to clock its biggest daily percentage loss against the dollar in almost two months.

Earlier on Monday, the pair rose roughly 1.5 percent to a session high of $1.4123, but remained a fair distance from $1.4720 touched last week on EBS, its highest since late September.

Against the yen, the euro was up 1 percent at 125.38 yen <EURJPY=>, while it climbed as high as 95.24 pence against sterling <EURGBP=>, inching closer to a record high of 95.56 pence hit last week.

Despite its losses against the euro, the dollar <JPY=> rose 0.9 percent to 89.90 yen <JPY=>.

The yen struggled broadly after the BOJ cut key interest rates to near zero on Friday, which further reduced the currency's already low interest rate level to 0.1 percent.

This helped to push higher-yielding currencies like the Australian <AUDJPY=R> and New Zealand <NZDJPY=R> dollars up roughly 1 percent each against the Japanese currency.


Dealers said the U.S. rescue of General Motors Corp (GM.N: Quote, Profile, Research, Stock Buzz) and Chrysler LLC [CBS.UL] had averted a crisis for now, but uncertainty remained over the companies' restructuring plans in return for the bailout would impact the economy already in a deep and long recession [ID:nPEK94492]

"The auto industry bailout removed one risk factor for the market, but the majority of market players see corporate profits to decline significantly in coming quarters," said Geoffrey Yu, strategist at UBS in London.

"We see more risks and more aggressive action from policymakers as the economic situation is not improving."

Market participants said that a grim U.S. economic outlook would continue to keep the dollar on the back foot, following its slump after the Federal Reserve cut benchmark interest rates to a historic low near zero last week.

With interest rates and the impact of the global recession continuing to drive currency movements, investors looked for more clues into how aggressively central banks around the world will keep cutting rates.

Recent comments by European Central Bank policymakers have suggested the central bank may be divided on the near-term course of action on rates.

ECB council member Miguel Angel Fernandez Ordonez said in an interview on Sunday that the ECB is likely to cut interest rates next month if inflation expectations are well below its 2 percent target.

But ECB Executive Board member Lorenzo Bini Smaghi warned about the risks of monetary policy being too lax, according to Rome daily Il Messaggero [ID:nLL383892].

Bank of England Deputy Governor John Gieve and policy board member Tim Besley on Monday both said that monetary policy alone could not help the UK economy avoid some of the worst consequences of the global credit crunch [ID:nLM559877].

BOJ Governor Masaaki Shirakawa said on Monday that Japan's economy was deteriorating and conditions were likely to become more severe. [ID:nTKG003163]

(Additional reporting by Tamawa Desai; Editing by Andy Bruce)

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