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Wednesday August 29, 2007 - 00:48:44 GMT
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FOREX NEWS-Yen gains vs dollar, euro on risk aversion

  FOREX-Yen gains vs dollar, euro on risk aversion
Tue Aug 28, 2007 4:21PM EDT

(Updates prices)

NEW YORK, Aug 28 (Reuters) - The yen rallied against the dollar and euro on Tuesday as investors, fearing tougher credit conditions will crimp global economic growth, bought the lower-yielding currency and sold riskier assets.

The dollar extended its decline after the release of minutes from the Aug. 7 Federal Reserve policy meeting showing the U.S. central bank acknowledging a policy response may be necessary if financial market conditions worsen.

Fed members expected a return to more normal conditions, but recognized the process will likely take some time, particularly in relation to subprime mortgages, the Fed's policy setting Federal Open Market Committee said.

"The headline worth highlighting is the one in which they say the Fed may act if financial markets conditions worsen," said Nicholas Bennenbroek, head currency strategist at Wells Fargo in New York.

Still, he cautioned against putting too much emphasis on the newly released Fed minutes.

"Remember, this (Fed meeting) was before the rout and they did exactly that. They acted. They cut the discount rate and they increased the amount of repos in the markets. The question now is if that response was enough and the answer we are only going to get at their next meeting."

The U.S. dollar changed hands down 1.2 percent at 114.36 yen <JPY=>, but was still off its 14-month low around 111.60 yen set in mid-August. The euro slipped 1.4 percent against the yen to 155.64 <EURJPY=R>.

The euro slipped 0.3 percent to $1.3608 <EUR=> from the previous New York session.


The yen was already up prior to the release of the minutes as risk averse investors juggled portfolios.

Overnight, a report from Britain's Times newspaper that State Street Corp (STT.N: Quote, Profile, Research) has $22 billion in exposure to the same kind of credit-related products that have bedeviled rivals in recent weeks inflicted further damage on carry trades.

A report showing U.S. home prices fell the most year-on-year in the second quarter to the worst decline in at least 20 years gave dealers a second reason to exit carry trades, in which investors borrow in low-yield currencies like the yen and invest in higher-yielding assets. For more click on [nN28240022].

"The market is still nervous and when you see warnings on credit or who is at risk, it does not mean there is market panic but there is risk and so we see some pullback," said Meg Browne, senior currency strategist at Brown Brothers Harriman.

State Street said in a statement that its commercial paper continues to be sold daily.

British bank Barclays (BARC.L: Quote, Profile, Research) denied a Financial Times report on Tuesday that it has several hundred million dollars of exposure to failed debt vehicles structured by its investment banking arm.


Against the Swiss franc, the dollar slipped 0.2 percent to 1.2005 francs <CHF=> and earlier touched a two-week low of 1.1962 francs. The euro fell 0.5 percent to 1.6344 Swiss francs <EURCHF=>.

The New Zealand dollar <NZD=>, which has the highest yield in the industrialized world, was down 2.3 percent to $0.6792.

Against the yen, the kiwi <NZDJPY=R> at current prices is flirting with the largest monthly decline since October 1987, according to Reuters data. Even if the yen loses some strength, it could still be the largest monthly decline in the kiwi against the yen since October 1998.

Volatility in financial markets has fueled speculation the Federal Reserve may cut its benchmark interest rate, after it reduced the discount rate at which banks borrow directly from the Fed by 50 basis points to 5.75 percent earlier this month.

Given such speculation, investors are awaiting a speech on "Housing and Monetary Policy" by Fed Chairman Ben Bernanke on Friday that could offer some indications of the future path of Fed policy. Expectations are fading for the European Central Bank to raise interest rates at its meeting next week. (Additional reporting by Vivianne Rodrigues and Steven C. Johnson)

© Reuters 2006. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.


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