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By Simon Falush
LONDON, Sept 3 (Reuters) - The yen edged lower and high-yielding currencies gained on Monday as risk aversion eased after the Federal Reserve and U.S. government promised to shelter the economy from the subprime mortgage crisis.
The dollar steadied versus the euro at the start of a week when U.S. data should shed light on the extent to which the credit market turmoil is taking a toll on economic growth.
Fed Chairman Ben Bernanke repeated late last week that the central bank would take all necessary steps to protect the economy from the market volatility, but would not bail out lenders or investors suffering big losses.
President George Bush pledged to help prevent homeowners from defaulting on risky mortgages, but emphasised that the government would not rescue the mortgage lending industry.
The comments reassured investors, spurring a rally on Wall Street on Friday. In foreign exchange, reduced risk aversion made people more willing to re-enter carry trades where purchases of high-yielders such as the New Zealand dollar are funded by cheap borrowing in currencies such as the yen.
"Markets are tentatively putting their toes back in the risk seeking bucket," said Geoff Kendrick, currency strategist at Westpac. "Bernanke's comments point towards a Fed rate cut which supports the case for risk appetite."
The yen was also under pressure from data released on Monday that showed weaker capital spending in the second quarter.
"This adds to expectations that any (Japanese) rate hikes will be delayed and we think a rate hike is now off the cards for the rest of 2007," Kendrick added.
By 0945 GMT, the dollar was up 0.2 percent at 115.99 yen <JPY=>. The euro was a third of a percent higher at 158.27 yen <EURJPY=>.
The dollar's trade-weighted index (.DXY: Quote, Profile, Research) was flat at 80.770 after having fallen to 80.44 on Friday, the weakest since early August when it hit a 15-year low of 79.957.
With the United States shut for Labor Day holiday, volumes were likely to remain thin, potentially exacerbating volatility.
The euro edged up to $1.3644 <EUR=>, supported by minority expectations that the European Central Bank could raise interest rates to 4.25 percent on Thursday. Most analysts though think that recent market volatility will keep ECB on hold for now.
The Australian dollar was the biggest winner on the day, climbing 0.5 percent to $0.8220 <AUD=> after an array of economic reports reinforced expectations the country's central bank would keep a bias towards raising interest rates.
DATA IN FOCUS
Euro zone manufacturing business put in its weakest performance in 1-1/2 years in August thanks to slipping order book growth although output was slightly up from July, data from RBS/NTC Economics showed.
(For full report click on [ID:nL29761824].)
U.S. data later this week includes manufacturing activity in August on Tuesday, the Fed's beige book summary of the economy's performance on Wednesday and the monthly jobs report on Friday.
"Pressure -- and the market's `reliance' -- upon the FOMC to act will certainly grow if economic data unveil any notable weakening in activity; and as such, this week's U.S. data release schedule, although fairly limited, is likely to be the most important for some time," said Bank of New York Mellon in a note to clients.
The Federal Open Market Committee has cut its discount rate for direct lending to banks and has pumped billions of dollars of temporary funds into the banking system to ease a credit crunch stemming from the worries about financial firms' exposure to subprime mortgages.
It is expected to cut rates by at least 25 basis points to 5.0 percent at its mid-September meeting.