Dollar, Yen Pull Back as Risk Appetite Edges Up

The yen fell across the board and the dollar retreated on Tuesday, as a recovery in global stock markets prompted investors to lock in steep recent gains in those two currencies.

The moves were seen as technical, analysts said, as there has been no major catalyst to change the market's perspective on risk-taking, even as the unwinding of leveraged trades away from risky assets remained entrenched.

Shares in Europe rose, following a 6.4 percent jump in Japan's Nikkei share average from a 26-year low.

Those gains boosted the euro and Australian dollar, two of the currencies most battered recently against the yen.

But the stock markets' relief rally and the yen's fall were seen as a temporary pause from the recent sell-off as the specter of a prolonged global recession should keep investors in risk-averse mode.

"The FX market is still completely driven by equities. We did see a rebound in Asian and European shares while U.S. stocks are also up and that's why we've seen the yen and dollar weaken a bit," said Vassili Serebriakov, senior currency strategist, at Wells Fargo in New York.

"But I don't think there is any major reason to expect that this fall in the yen and dollar would be pronounced and long-lasting. Economic fundamentals are still weak all over the world," he added.

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In midday trading, the dollar jumped versus the yen, moving away from a 13-year low just above 90 yen struck on Friday.

The dollar trimmed gains against the yen after a gauge of U.S. consumer confidence plunged to a record low this month.

"It's a dismal reading," said David Watt, senior currency strategist at RBC Capital Markets in Toronto. "Lowest on record. I was wondering how low it might go, but it blew through my worst expectations."

The euro, meanwhile, edged up versus the dollar, after hitting a 2-1/2-year low earlier.

European Central Bank President Jean-Claude Trichet on Monday said the bank could cut rates from the current 3.75 percent at its policy meeting next week.

The Fed is also seen easing the fed funds rate -- currently at 1.50 percent -- by at least half a percentage point at its two-day meeting starting on Tuesday.

Intervention Risk

The euro was up sharply against the yen, having earlier topped 120 yen.

The euro hit a 6-1/2 year low of 113.79 yen on Friday, according to electronic trading platform EBS.

Traders said the yen's fall has eased intervention risks from the Bank of Japan to weaken the currency for trade purposes, but remained a threat given the surge in volatility.

The yen's one-month implied volatility hit more than 39 percent on Monday, Reuters data show, and while it eased on Tuesday, it remained elevated at 32 percent.

Distressed stock prices and the yen's rapid rise succeeded in getting the Group of Seven rich nations' attention as they warned against excessive yen volatility on Monday.

That was seen as opening the way for the BoJ to intervene if warranted.

While the prospect of intervention loomed, some analysts were doubtful such a move could limit the yen's surge unless any central bank action was globally coordinated.

Analysts at BNP Paribas said the mere threat of intervention would not be sufficient to halt the yen's advance since current market flows were a result of forced position liquidations amid increased volatility and falls asset prices.

"It will not be the case of monetary authorities 'scaring' speculative investors out of positions to deflate a speculative bubble, but more a case of having to change the supply dynamics of the yen market, providing much-needed liquidity for investors to unwind positions and repatriate capital."

The Australian dollar climbed against the U.S. dollar after the Reserve Bank of Australia intervened to prop up the Australian currency for a third straight day.

The Aussie dollar has lost more than 35 percent against the greenback since peaking in July.

Copyright 2008 Reuters. Click for restrictions.