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FOREX-US dollar, yen gain as risk appetite diminishes

Reuters - Thursday, October 16

* Dollar rises against euro; yen gains

* Bernanke comments fan global risk aversion

* High-yielding currencies fall, U.S. stocks tumble

By Gertrude Chavez-Dreyfuss

NEW YORK, Oct 15 - The dollar rose against the euro for the first time this week on Wednesday, while the yen gained on renewed concerns the U.S. government's $250 billion proposed injection into troubled banks may do little to heal a bruised financial sector.

Federal Reserve Chairman Ben Bernanke added to market tension when he said it will take time to restore normal flows of credit but he pledged that the Fed -- the U.S. central bank -- would continue to act aggressively to fight the crisis. He made the remarks before the Economic Club of New York.

High-yielding currencies such as the Australian and New Zealand dollars also slid as world stocks slumped, ending a rally seen earlier this week after U.S. and European governments announced sweeping bank rescue plans.

Safe-haven U.S. Treasuries rose while U.S. stocks plunged, with the Dow Jones industrial average <.DJI> and the S&P 500 <.SPX> posting their biggest one-day fall since October 1987, sending the dollar and yen soaring.

"The dollar is going to rally in this kind of environment, with investors flocking to U.S. Treasuries today. The yen will also continue to do well," said Mark Frey, vice president of FX trading at Custom House, a global payments dealer in Victoria, British Columbia.

"Bernanke's comments earlier have inspired another round of risk aversion. Obviously, he was concerned about the growth prospects for the U.S. economy, and we haven't seen the end of credit tightening."

By late afternoon trading, the euro fell to session lows below $1.3500 <EUR=> against the dollar, down nearly 1 percent on the day. The euro zone currency also dropped versus the yen to 134.95 yen <EURJPY=>, down 3.1 from late on Tuesday.

The dollar dropped 2.1 percent against the yen to 100.00 <JPY=>. The low-yielding Japanese unit tends to rally when risk appetite fades as investors rush to get out of trades in higher-yielding currencies and assets financed with cheaply borrowed yen.

Data earlier showing U.S. retail sales posted their biggest monthly decline in more than three years last month also weighed against the dollar versus the yen.

HIGH-YIELDERS FALL, CREDIT TIGHTNESS STILL EVIDENT

The greenback has lately also tended to benefit in such an environment against the euro and high-yield currencies as investors seek relative safety in dollar-denominated assets such as U.S. Treasuries.

Sterling fell 0.8 percent to $1.7271 <GBP=>. The Australian dollar fell nearly 6 percent to US$0.6604 <AUD=>, while the greenback rose 2.3 percent against its Canadian counterpart to C$1.1877 <CAD=> as oil prices fell.

Interbank rates on dollar, euro and sterling funds, meanwhile, fell for a second day on Wednesday as massive measures from governments worldwide have begun to unlock credit to cash-strapped banks and companies.

The U.S. commercial paper market also showed further moderate improvement, suggesting sorely needed funds are flowing to companies worried about a recession.

The European Central Bank on Wednesday said it will allow banks to swap a larger range of their assets for central bank funds and offer more funds across a range of currencies in its latest attempt to combat the punishing financial crisis.

It will also start offering unlimited long-term euro funds at fixed interest rates and hold its first-ever open market foreign exchange swaps to provide extra liquidity in U.S. dollars and Swiss francs to euro zone banks.

Still some analysts said credit tightness, while less severe than a week ago, was still evident, which has left some investors reluctant to part with their cash rather than putting it into higher-yielding investments.

"If the risk environment is going to improve near term, it is going to rise or fall by events in the money market, for that is where the government has directed some of the more sweeping measures," said Alan Ruskin, chief international strategist, at RBS Global Banking and Markets in Greenwich, Connecticut. (Additional reporting by Steven C. Johnson; Editing by James Dalgleish)

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