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Tuesday January 26, 2010 - 13:49:01 GMT
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FOREX NEWS-Yen gains as China implements reserve ratio hike

7:39am EST

* Yen up as China tightening move prompts risk aversion

* Euro hits 9-month low, dollar 1-month low vs yen

* Dlr also up on risk aversion; German Ifo above forecasts

(Updates prices, adds quotes; changes byline)

By Neal Armstrong

LONDON, Jan 26 (Reuters) - The yen rose sharply on Tuesday after China's implementation of rises in some banks' reserve ratios cut risk appetite and underlined concerns that monetary tightening may slow the country's economic growth.

The dollar fell against the yen but rose against most other currencies after the China news raised the prospect of further tightening.

Sterling tumbled against the dollar after data showed Britain only just emerged from recession at the end of 2009, suggesting any UK monetary tightening was still a lomg way off.

China's move sparked selling in positions funded by the low-yielding yen, which hit a nine-month high against the euro, even as ratings agency Standard and Poor's cut its outlook on Japanese sovereign debt to negative from stable.

China's central bank ordered banks that need to raise their reserve ratios to implement the change on Tuesday, banking sources said, prompting falls in equities. [ID:nSGE60P039].

Analysts said the change, flagged by Chinese officials last week, underlined the market's low tolerance for risk.

"Risk aversion is in vogue right now. The market is still quite skittish about equities, which is coming through and helping the yen," said HSBC director of currency strategy Paul Mackel.

By 1220 GMT, the euro was down more than 1 percent against the Japanese currency at 126.14 <EURJPY=R>, yen off an earlier nine-month low of 125.96 yen after Japanese deputy finance minister Yoshihiko Noda pledged fiscal discipline following the S&P announcement.

Finance Minister Naoto Kan echoed those comments, saying Japan must show it has a roadmap to restore fiscal health. [ID:nTKF106818]

The yen initially trimmed gains after the S&P announcement, which came in early European trade, but quickly recovered as analysts shrugged off the news on the view that only a small proportion of Japanese government bonds are held offshore.

"It would be a very different story if a lot of foreigners held JGBs. It is another reminder that the fiscal side of the story continues to rot in many of the developed economies and I think that's at the forefront of investors' minds right now." Mackel said.

The dollar was trading at 89.62 yen <JPY=>, down 0.7 percent, after falling to a one-month low at 89.39 after Noda's remarks, having earlier traded as high as 90.55 yen.

The euro <EUR=> was down 0.5 percent versus the dollar at $1.4075, despite a German survey showing a bigger-than-expected rise, with the Ifo business climate at 95.8 in January, up from 94.7 in December. [ID:nBAE003725]


The higher-yielding Australian and New Zealand dollars fell more than 1 percent versus the dollar and the yen.

"This could pan out to be more of a sustainable period of risk aversion and a pause in the global recovery scenario," said SEB currency strategist Carl Hammer in Stockholm.

"This will weigh on commodity currencies as investors move out of pro-cyclical and into pro-defensive currencies," he said. The yen and the U.S. dollar would be the main beneficiaries.

Sterling <GBP=D4> fell 0.75 percent against the dollar to $1.6118 after growth data showed Britain exited recession in the fourth quarter much more slowly than expected. [ID:nLDE60P0WS]

The dollar index <.DXY> gained 0.3 percent to 78.418.

Earlier, the Bank of Japan kept interest rates unchanged at 0.1 percent as widely expected, though it predicted a slightly slower annual pace of price falls. [ID:nTKU105812]

(Additional reporting by Jessica Mortimer; Editing by Nigel Stephenson)

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