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FOREX-Yen, dollar fall broadly as equities rise

Published 02/13/2009, 04:39 AM
Updated 02/13/2009, 04:40 AM

* Dollar loses ground vs European, higher yielding FX

* Yen falls broadly as global shares rise

* G7 seen unlikely to issue strong message on currencies

By Kirsten Donovan and Jamie McGeever

LONDON, Feb 13 (Reuters) - The yen and the dollar fell on Friday as world stock markets rose on hopes for a U.S. government programme to subsidise mortgages and as investors readied for a Group of Seven finance officials' meeting.

The dollar and the yen, which often show an inverse correlation to investors' risk appetite, lost ground to the euro and higher yielding currencies as Asian and European equities rose.

The Australian dollar meanwhile, got an extra boost to trade up over 1 percent against the U.S. dollar after a last minute deal helped push a stimulus package through Australia's parliament.

"It's mainly the yen that's on the defensive on the back of (rising) risk appetite," said Niels Christensen, FX strategist at Nordea in Copenhagen.

In a major break from existing aid programs, the latest U.S. plan would seek to help homeowners before they fall into arrears, sources familiar with the plan told Reuters.

A rising wave of U.S. mortgage delinquencies has saddled the global banking system with big losses that have led banks to recoil from lending, choking economies around the world.

Analysts noted that the market had bought yen in recent sessions, but investors were closing some of those positions ahead of the G7 meeting on Friday and Saturday and a long weekend in the United States.

By 0900 GMT the dollar had risen 0.5 percent to 91.35 yen, while the euro rose 0.35 percent to $1.2908 and climbed 0.95 percent to 117.94 yen. The euro may struggle, however, to sustain its gains, given the latest batch of weak economic data from the 16-nation bloc that could hasten European Central Bank interest rate cuts.

Preliminary data showed German gross domestic product (GDP) contracted by 2.1 percent quarter-on-quarter in the final three months of last year, its worst quarterly performance since reunification in 1990.

France's economy also shrank at its fastest pace in 34 years in the fourth quarter, data released on Thursday showed, paving the way to a gloomy pan-euro zone reading at 1000 GMT.

"I expect the euro to struggle. There are more rate cuts to come from the ECB. They're reluctant to cut, but I'm sure the (economic) numbers will force them to cut not just once but several times," Nordea's Christensen said.

G7

Sterling, also benefitting from the pick up in risk appetite, rose off 1 week lows hit on Thursday, up 1.32 percent against the dollar at $1.4449. The euro fell 0.92 percent to 89.35 pence.

But ING FX strategist Tom Levinson said the increasing premium demanded for insuring UK and U.S. government debt posed downside risks for the dollar and sterling.

Credit rating agency Moody's Investors Services said late on Thursday that the triple-A credit ratings of both the United States and Great Britain are "being tested" by the strains facing the global economy, while countries such as France and Germany are proving more resistant.

The comments pushed the cost of protecting debt issued by the British government to an all-time high and by the U.S. to a near record high of 84 basis points. For analysis on the effect of sovereign default risk on currencies see.

Few expected the G7 finance officials meeting in Rome would issue a strong message on currencies in general or the yen in particular.

Even though the yen touched its highest in more than 13 years against the dollar in January, at 87.10 per dollar, it has retreated from that level and stabilised for now.

Japanese Finance Minister Shoichi Nakagawa said the G7 officials would confirm their anti-protectionist stance, but currency issues would take a back seat..

"Few market players are expecting the G7 to come out with a strong message on the yen," said Masafumi Yamamoto, head of foreign exchange strategy for Japan at the Royal Bank of Scotland.

(Additional reporting by Charlotte Cooper; Editing by Ruth Pitchford)

(kirsten.donovan.reuters.com@reuters.net, +44 20 7542 8675))

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