Yen gains as currencies shaken by credit turmoil

TOKYO (AFP) - Major currencies were roiled by credit market turmoil Thursday, with the yen soaring against the euro, dollar and high yielding currencies as players unwound risky bets.

Dealers dumped the Australian and New Zealand dollars as they scrambled to pull out of carry trades that involve borrowing cheap credit in countries like Japan to invest in regions with higher interest rates.

The dollar continued to gain on the euro and regional Asian units such as the Singapore dollar, buoyed by a flight to safe assets such as US government bonds as Asian stocks suffered one of their worst selloffs in recent years.

In a day of extreme volatility, the yen hit four-month highs against the euro and the dollar, while the Australian dollar hit its lowest level against the greenback in four months in a sharp reversal from recent 18-year highs.

The dollar tumbled to as low as 115.70 yen before recovering to 116.05 in Tokyo afternoon trade, down from 116.60 in New York late Wednesday.

The euro fell to 1.3419 dollars from 1.3444 and to 155.71 yen from 156.79.

"Market confidence is falling as players are unable to calm down," said Kazuhiko Shibata, manager at Dresdner Bank's Tokyo branch.

"The depth of the problem remains difficult to assess and so risk-unwinding and aversion are expected to continue," he added.

For months the yen had been the whipping boy of the foreign exchange market as Japanese savers and speculators sent money overseas to countries such as Britain, New Zealand and Australia where they could earn better returns.

But recent problems in US subprime mortgages for risky borrowers have sparked fears of a credit squeeze, which has in turn triggered a sharp unravelling of this carry trade, pushing up the yen.

With high-yielding currencies no longer in favour, the Australian dollar fell to 93.68 yen from 96.01 in late Asian trade Wednesday. Sterling sank to 230.43 yen from 232.07 while New Zealand's dollar slid to 80.24 yen from 82.23.

"Credit market concerns continue to roil the market," Barclays Capital analysts wrote in a research note.

"In the near term, concern about the macro impact of the recent market turmoil is likely to continue, putting further downward pressure on risky assets," they added.

The Australian dollar fell to its lowest level against the US unit in four months, hitting 80.39 US cents after falling through technical support levels.

"It was one of those areas that people would have been looking for a bounce but it didn't materialise," said Robert Rennie, head of foreign exchange strategy at Westpac Banking Corp. in Sydney.

Ongoing action by central banks to ensure ample liquidity in the banking system had little impact on currencies.

The Bank of Japan on Thursday injected 400 billion yen (3.4 million dollars) in extra funds into the money market, the first such move in three days.

The US Federal Reserve on Wednesday also infused seven billion dollars in cash to support the financial system.

"Investors are worried about a credit squeeze in the long term," said Shibata at Dresdner Bank.

"At the moment, the liquidity injection is good for the banking system, but beyond that there are worries. It's not like cash is being handed out to funds," he said.

The dollar was higher against other Asian currencies, rising to 1.5392 Singapore dollars from 1.5322, to 9,480.50 Indonesian rupiah from 9,399, to 46.70 Philippine pesos from 46.23 and to 943.35 South Korean won from 932.42.

The greenback edged up to 32.91 Thai baht from 32.81 and to 33.12 Taiwan dollars from 33.01.