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By Simon Falush
LONDON, Aug 22 (Reuters) - The yen lost ground and high-yielding currencies strengthened on Wednesday as calmer financial markets encouraged investors to adopt a slightly more aggressive profile and re-enter carry trades.
Federal Reserve Chairman Ben Bernanke signalled the U.S. central bank was prepared to lower its key federal funds rate if necessary to quell market unrest, a top U.S. lawmaker said on Tuesday after meeting the Fed chief.
Such a move will be pivotal in determining market sentiment and how currencies perform, analysts said.
"The markets are calm today but the focus is on what the Fed does," said Laura Ambroseno, currency strategist at Morgan Stanley. "Markets are fairly quiet at the moment but there is a sense of anticipation. It may be that we are in the eye of the storm rather than the storm having passed."
While confidence in global credit markets has by no means been fully restored and fears remain that short-term liquidity could dry up, investors across a range of asset classes felt bold enough to shun safe-havens and seek higher returns.
The low-yielding yen was sold in favour of the dollar, euro and Australian and New Zealand dollars, while European equities rose in early trading and top-rated government bond prices fell.
Widespread expectations the Bank of Japan will keep interest rates on hold at an ultra-low 0.5 percent on Thursday, given the current climate, also weighed on the yen, analysts said.
"I guess the markets are saying not only will the BOJ postpone the August hike but increasingly it will (hold off) in September too," said Michael Klawitter, currency strategist at Dresdner Kleinwort in Frankfurt.
"That leaves the negative carry for the yen too large, following the recent correction, and too tempting for speculators to get back in. But (cross yen) rallies will be temporary and nobody will be willing to bet on any lasting upward move."
At 0952 GMT the dollar was up 0.4 percent on the day at 114.87 yen <JPY=>, continuing to consolidate after hitting a 14-month low of 111.60 yen last week.
The euro rose 0.6 percent against the yen to 154.88 yen <EURJPY=R> and was up 0.2 percent against the dollar at $1.3486 <EUR=>.
FED RATE CUTS EYED
The Australian dollar was up 0.6 percent against the yen at at 92.10 yen <AUDJPY=R> and the New Zealand dollar was up 0.4 percent at 79.90 yen <NZDJPY=R>.
Analysts said nervousness in financial markets is likely to persist for some time, with investors wary of taking on risk as conditions in the commercial paper markets, a critical source of short-term funding, remain tight given ongoing turmoil in the U.S. subprime mortgage sector.
Yields on three-month U.S. Treasury bills, a barometer of investors' demand for safety, rebounded on Wednesday to 3.6 percent <US3MT=RR> from a low of 2.9 percent on Tuesday.
Sen. Christopher Dodd, chairman of the Senate Banking Committee, said the Fed's Bernanke had told him the U.S. central bank would use "all available tools" to calm financial markets. That raised expectations the Fed may soon lower its funds rate after trimming its discount lending rate late last week.
But Richmond Federal Reserve Bank President Jeffrey Lacker poured some cold water on hopes for an imminent interest rate cut, saying market turmoil only warrants a change in rates if it affects the outlook for inflation or growth.
U.S. rates futures are still pricing in almost 75 basis points of easing this year, however. (Additional reporting by Jamie McGeever)