(Changes byline, updates prices, adds quotes)
By Meg Clothier
LONDON, Nov 12 (Reuters) - The yen sprinted to an 18-month high against the dollar on Monday as investors unwound risky carry trades due to nervousness over credit-related losses at U.S. financial firms and weak global equity markets.
Worries about U.S. financial institutions' losses from the subprime mortgage crisis, and ensuing credit market turmoil, found a new focus on Friday when Wachovia Corp (WB.N: Quote, Profile, Research) reported a potential $1.7 billion loss on mortgage-related debt.
Bank of America Corp (BAC.N: Quote, Profile, Research) said late last week that "significant dislocations" in the debt capital markets would hurt fourth-quarter results, and JPMorgan Chase & Co Inc (JPM.N: Quote, Profile, Research) said shaky credit markets could trigger more write-downs.
"The dominant theme for the FX market is risk reduction," said Adarsh Sinha, currency strategist at Barclays Capital.
That was translating into a reversal of carry trades, where investors borrow low-yielding currencies to fund purchases of higher-yielding assets.
"We're seeing currencies like the yen and the Swiss franc appreciate whereas some of the higher-yielding, riskier currencies, like the Aussie or sterling, are selling off," Sinha said.
The dollar fell to an 18-month low of 109.62 yen, according to Reuters data <JPY=>, before recovering slightly to trade at 109.75 by 1143 GMT, down about 1 percent on the day.
The euro was down 1.6 percent at 159.88 yen <EURJPY=>, breaching the 160 barrier for the first time in two months.
But the dollar index, which tracks the greenback against a basket of six major currencies (.DXY: Quote, Profile, Research), was 0.52 percent higher at 75.797.
"The dollar's slightly stronger across currencies -- we've tended to see that happen in past episodes of risk reduction. Whenever the carry trade sold off sharply the dollar tended to appreciate," Sinha added.
Overall volumes were likely to remain subdued, potentially leading to higher market volatility, as the United States marks its Veterans' Day holiday.
Against the dollar, the euro slipped 0.7 percent to $1.4573 <EUR=>, retreating from a record high of $1.4752 hit on Friday.
Jose Manuel Gonzalez-Paramo, a member of the European Central Bank's Executive Board echoed President Jean-Claude Trichet, highlighting inflationary pressures and saying that sharp movements in currencies are not good for growth.
"After introducing the term 'brutal' ... Trichet has created a more neutral environment for euro/dollar," ING said in a note.
"Consolidation should continue given the Eurogroup meeting tonight, where finance ministers and the ECB may express their displeasure over the recent euro/dollar (moves)."
After stocks fell in Wall Street on Friday and in Asia overnight, European stocks (.FTEU3: Quote, Profile, Research) were last trading lower.
Sterling, which has benefited from the highest interest rates within the Group of Seven major economies, was hit by the carry unwind, falling to its lowest versus the euro since January 2005 <EURGBP=>.
Various measures pointed to a reduced willingness to take on risk.
One-week implied volatility in euro/dollar rose to a fresh 2-1/2 year peak of 10.9 percent <EURSWO=>, while one-month dollar/yen volatility spiked up to 17.40 percent, closing in on peaks of 22.2 percent set during the height of the credit market crunch in mid-August <JPY1MO=>.
Emerging sovereign spreads widened three basis points (11EMJ: Quote, Profile, Research), while the iTraxx Crossover index <ITCRS5EA=GFI>, a closely watched indicator of European credit market sentiment, was at its widest in two months.
(Editing by Ruth Pitchford)