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By Jamie McGeever
LONDON, Aug 20 (Reuters) - The yen weakened broadly on Monday, continuing to give back some of last week's hefty gains in a turnaround sparked by the U.S. Federal Reserve's surprise decision on Friday to cut its discount lending rate.
The Fed's action jammed the brakes on the yen carry trade unwind, although investors cautiously waited to see if it would help settle nerves over turmoil in the credit sector.
The dollar regained a footing above 115 yen and the euro jumped back above 155 yen, while willingness to take on risk again saw the high-yielding Australian and New Zealand dollars rebound back above $0.80 and $0.70, respectively.
But these moves and the rebound in global equity markets, did not reflect a uniform assumption the Fed has succeeded entirely in calming financial markets or eliminated fears tighter credit conditions could crimp economic growth.
"I think you can see some temporary respite in terms of what the Fed has done, but from our standpoint, we aren't out of the woods yet," said Frida Gjorstrup, currency strategist at JP Morgan in London.
"Markets remain nervous. We still recommend very light positions, on the defensive side," she said, meaning holding bets that the yen and Swiss franc will appreciate.
At 0815 GMT, the dollar was up 0.9 percent on the day at 115.35 yen (JPY: Quote, Profile, Research), having fallen to a 14-month low of 111.58 yen on Friday, according to Reuters data.
The euro was up 1 percent against the yen at 155.72 yen <EURJPY=>, after falling below 150 yen on Friday, and was up 0.2 percent against the dollar at $1.3498 <EUR=>.
The high-yielding New Zealand dollar -- the biggest loser last week in the carry trade unwind frenzy -- rebounded, gaining 0.6 percent against the dollar to $0.7005 <NZD=> and the Australian dollar recovered around 0.8 percent to $0.8045 <AUD=>.
RATE VIEWS SHIFT
The Fed on Friday cut the discount rate it charges on direct loans to banks by 50 basis points to 5.75 percent and said U.S. economic growth could slow in light of credit market tightening.
The central bank's statement fuelled a market view that it could be moving towards lowering its benchmark federal funds rate, which it held at 5.25 percent.
This halted the global selloff in stocks, rally in government bonds and rush to exit foreign exchange carry trades, in which investors borrow the low-yielding yen to fund investments in high-yielding currencies and assets.
The yen had hit a 14-month peak against the U.S. currency on Friday then fell after the Fed's unexpected decision.
A 3 percent jump in Tokyo shares along with gains of over 1 percent in European stocks on Monday helped investors recover their appetite for risk.
But the biggest drivers for currency markets remain credit availability, money market liquidity and news of the battered U.S. subprime mortgage market.
A slew of Wall Street and City banks have dramatically altered their forecasts for monetary policy, now expecting the Fed to cut its key fed funds target rate this year, and no longer pricing in rate hikes from the European Central Bank or the Bank of England.
"The Fed's actions on Friday have underpinned sharp rallies across equity markets. The prospects of a sustained recovery are perhaps no greater than they were on Friday morning, however," wrote FX strategists at The Bank of New York-Mellon.
"We cannot dismiss the possibility that risk appetites may indeed revive, but we suspect that the balance of probability is set firmly against this eventuality."