Yen under pressure as stocks rebound

TOKYO (AFP) - The yen lost ground in Asian trade Thursday as rebounding global stock markets dented the currency's recovery, dealers said.

They said that easing fears of a credit crunch had reduced the risk aversion that drove the yen up sharply last week.

The dollar firmed to 115.92 yen in late Tokyo morning trade from 115.31 in New York late Wednesday.

The euro edged up to 1.3552 dollars from 1.3541 and to 157.03 yen from 156.17.

"There is a feeling of reassurance in the market with share prices regaining stability. I think we've escaped the worst period," said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank in Tokyo.

Traders were waiting for Bank of Japan governor Toshihiko Fukui's press conference later Thursday after the end of the central bank's two-day monetary policy meeting where rates were expected to be left at 0.5 percent.

Japanese share prices rallied Thursday morning following a strong advance overnight on Wall Street, with the Tokyo Stock Exchange's benchmark Nikkei-225 of leading shares up almost 2.5 percent by lunch.

Global markets were roiled last week by problems stemming from the US subprime mortgage sector catering to borrowers with patchy credit histories.

Fears of a credit squeeze prompted investors to flee to safe havens such as US Treasury bills and to reduce risk appetite, pulling out of risky positions such as so-called "carry trades."

Carry trades are when investors borrow low-yielding currencies such as the yen to buy high-return currencies and assets including the Australian and New Zealand dollars, or the British pound.

Those high-yielding currencies rose against the yen early Thursday as investors started to regain some of their appetite for risk.

The Australian dollar firmed to 93.28 yen from 91.38 while sterling gained to 230.91 yen from 228.75.

"This shows that risk reduction has slightly decreased. Although it's too soon to say carry trades have made a comeback, currencies that were over-sold are being bought again," said Muramatsu.

Markets are now watching to see whether the Fed cuts its funds rate that commercial banks charge each other to further reassure jumpy markets.

"Traders priced in more aggressive Fed interest rate cuts over coming months, which helped equities recover from earlier losses," NAB Capital strategist John Kyriakopoulos wrote in a note to clients.

Futures markets have priced in a rate cut at the Fed's next meeting on September 18, dealers said.

Reports that the largest US mortgage provider Countrywide Financial could escape bankruptcy cheered markets, after Bank of America announced overnight it would invest two billion dollars in the troubled company, dealers said.

The dollar extended losses against the euro on speculation that the European Central Bank will raise borrowing costs next month despite recent financial market turmoil, dealers said.