*Risk aversion continues to underpin yen, dollar
*Worries over global recession, credit markets remain
*Uncertainty over U.S. auto industry fans credit jitters
*Bank of Japan starts two-day policy meeting
By Chikako Mogi
TOKYO, Nov 20 (Reuters) - Risk aversion kept the yen and the dollar firm on Thursday as global recession worries and credit jitters fuelled by uncertainty over the struggling U.S. auto industry led investors to cut risk assets and repatriate funds.
The dollar and euro were off one-week lows against the yen hit on Wednesday, but traders said the yen remained firm overall as investors were likely to keep unwinding carry trades in which they bought high-yielding assets using the low-yielding yen.
The dollar may be vulnerable against the yen due to deepening concerns about U.S. corporate earnings and expectations the Federal Reserve will cut interest rates from the already low 1 percent at a meeting next month, traders said.
But the dollar was likely to benefit from general risk aversion triggered by falling stocks and growing uncertainty over whether U.S. automakers, including General Motors, will win emergency government loans.
The top three U.S. carmakers have warned that bankruptcy for one or more of them would lead to massive job cuts.
"The focus is on GM's fate, and mounting credit market worries could accelerate investors' moves to repatriate overseas investments, supporting the dollar," said Hiroshi Yoshida, a trader at Shinkin Central Bank.
"The continuing risk aversion means investors will sell assets for cash, and such position unwinding will also help strengthen the yen against a broad range of currencies," he said.
Yoshida said the yen's rise was unlikely to be as sharp as last month, and an immediate challenge of the 90 yen mark was unlikely in the near term.
"But the yen is poised for a gradual uptrend and a rise beyond 90 yen is possible over the medium term," he said.
The dollar was little changed at 95.75 yen, slightly above a one-week low of 95.66 yen hit on Wednesday, after rising as high as 96.12 yen earlier.
The euro was up 0.3 percent at 119.85 yen, also a tad above a one-week low of 119.50 yen hit on Wednesday. The euro edged up 0.2 percent to $1.2516.
Trading was subdued, keeping prices in narrow ranges.
"Caution persists over credit risks among financial institutions," said Mitsuru Sahara, a senior manager at Bank of Tokyo-Mitsubishi UFJ. "But measures by global central banks to pump in ample funds seem to have calmed down the currency market a little bit," he said.
The Nikkei share average extended its falls to more than 4 percent, hitting a three-week low below 8,000, as the yen's strength hit exporters.
Japan's exports fell as expected in October, logging the first annual drop in four months, as the global economic slowdown takes its toll on overseas demand for Japanese goods.
Market reaction was muted as recent data had already shown Japan, along with the euro zone, entered a recession in the third quarter.
The Bank of Japan begins a two-day policy meeting on Thursday, with expectations the central bank may mull more steps to soothe frazzled money markets but keep rates steady.
Analysts said the outcome of the BOJ meeting on Friday may not offer much incentive to the market as the focus is more on moves by the Fed and central banks in Europe.
U.S. and European stocks fell to their lowest levels in 5-½ years on Wednesday as prospects faded for a Washington bailout of the auto industry and data showed U.S. consumer prices dropped at a record pace in October.
The dollar slipped versus the yen on Wednesday, as worries over the auto industry and the record slide in consumer prices fanned fears of a deeper recession.
Minutes on Wednesday from the Fed's meeting last month added to the bleak global economic view, as the central bank said U.S. economic data in the run-up to the December meeting would show significant weakness and could well mean that another rate cut may be needed. (Additional reporting by Kaori Kaneko; Editing by Michael Watson)