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By Veronica Brown
LONDON, Aug 9 (Reuters) - The low-yielding yen jumped against the dollar and euro, while high-yielders slid on Thursday as investors cut exposure to carry trades due to continuing worries over problems in credit markets.
Short-term deposit rates in euro zone and U.S. money markets surged, with dollar deposit rates for tomorrow/next day delivery rising by more than half a point to an intraday high of 5.86 percent, as liquidity concerns rippled across global money markets.
The surge in short-term rates gave support to the dollar against other currencies, including the euro.
Earlier, French bank BNP Paribas said three of its funds were hit by problems in the U.S. subprime mortgage sector and decided to temporarily suspend redemptions from the funds (see [nWEB6129]), prompting a sharp pullback in FX carry trades, a fall in equities and a rally in government bonds.
Investors had tentatively dipped their toes back into carry trades -- borrowing yen to fund purchases of high-return assets -- on Wednesday, encouraged by calmer financial markets after the U.S. Federal Reserve cooled expectations for a rate cut.
The Fed also acknowledged market turbulence caused by credit market jitters but maintained economic growth would continue.
However, worries about the impact on the wider economy from problems in the U.S. subprime market, which extends credit to borrowers with poor credit histories, refused to subside. The yen rallied and high-yielding units like the Australian and New Zealand dollars weakened.
"The market still remains very fragile in terms of sentiment and is very susceptible to negative shocks that impact the credit market," said Bank of America currency strategist Kamal Sharma.
"This is a picture right across the spectrum, where liquidity is drying up considerably," he added.
By 1020 GMT, the dollar was down 0.7 percent on the day at 118.80 yen <JPY=>, while the euro slid 1 percent to 163.41 yen <EURJPY=>.
The single currency slipped 0.3 percent to $1.3746, although July's record high of $1.3852, according to Reuters data, was still within reach. The dollar index was up 0.21 percent at 80.50 (.DXY: Quote, Profile, Research).
HIGH-YIELD RALLY CRUMBLES
The high-yielding Aussie <AUD=> and New Zealand dollars <NZD=>, popular targets for carry trades, felt the strain of risk aversion and fell 0.7 percent and 1.1 percent on the day, respectively, versus the U.S. dollar.
Both currencies had been supported in Asian overnight trade as solid employment data in both countries reinforced the outlook for policy rates to stay high at 6.5 percent and 8.25 percent respectively.
Asian stock markets tracked a third day of solid gains on Wall Street, with Japan's Nikkei share average (.N225: Quote, Profile, Research) climbing over 1 percent. [nT364450]
However the ripple of risk aversion stopped European stocks from tracking Asian gains, with the FTSEurofirst 300 index down 1.1 percent at 1,537.65 (.FTEU3: Quote, Profile, Research).
"There is nothing else driving markets at all other than risk aversion or risk appetite driven by how concerned the market is about subprime," RBC senior currency strategist Adam Cole said.
Fears about the fallout from rising U.S. subprime mortgage defaults and spreading losses in credit markets have spooked investors in the past few weeks.
Several major U.S. companies have announced losses from exposure to these subprime loans, sending jitters across the financial services sector.