Yen firms in Asian trade as investors avoid risks

TOKYO (AFP) - The yen gained against other major currencies in Asian trade Tuesday, lifted by growing risk aversion following recent turmoil on global markets, dealers said.

They said that the yen continued to benefit from an unwinding of risky 'carry trades' -- when speculators borrow in countries with low interest rates, such as Japan, to buy high-yielding currencies.

The dollar fell to 117.97 yen in Tokyo morning trade from 118.23 in New York late Monday.

The euro firmed to 1.3614 dollars from 1.3608. It fell to 160.59 yen from 160.86, approaching last week's near four-month low just below 160 yen.

Recent concern that money markets around the globe may be facing a liquidity shortage has prompted investors to reduce exposure to risky trades.

Concerted action by world central banks to supply liquidity to money markets has brought a brief sense of relief to players although they remain on edge for further possible bad news on the US mortgage sector, dealers said.

Investors "will continue to worry that a credit crunch will hurt economic growth," NAB Capital strategist John Kyriakopoulos wrote in a note to clients.

The unwinding of carry trades has pressured high-yielding currencies such as the British pound and the Australian and New Zealand dollars, while boosting the Japanese currency.

The US, eurozone and Japanese central banks on Monday pumped billions more dollars into money markets.

The Bank of Japan said Tuesday it would withdraw 600 billion yen (5.0 billion dollars) from the banking system, the same amount that it had injected on Monday, reflecting easing fears of a credit crunch.

"With the central banks supplying liquidity there is a moment of respite in the market but we cannot let our guards down as we are waiting for further negative news" such as in the banking sector, Shigeru Nakane, senior client manager at Resona Bank said.

The central bank's injections into the financial system have dampened expectations of further near-term rate hikes, dealers said.

The ECB's moves have led to speculation that the central bank will not raise rates in September as previously widely expected, Kyriakopoulos noted.

However, the Japanese central bank's decision to withdraw funds could be aimed at preparing the ground for an interest rate hike at its meeting next week, Resona's Nakane said.

Dealers said they were uncertain what to expect from the BoJ next week.

Japan is believed to be less exposed to the fallout from the problems in the US mortgage sector than Europe and the United States, dealers said.

Traders are waiting for a batch of key US economic indicators this week including consumer prices, housing starts and building permits.

Brighter-than-expected US retail sales released on Monday helped to cushion the greenback's fall, dealers said.