* Yen soars, hits 6-mth high vs dollar, 3-yr peak vs euro
* World stocks tumble, Nikkei worst fall since 1987 crash
* Bernanke rate cut signal fails to soothe nerves
By Eric Burroughs
TOKYO, Oct 8 (Reuters) - The safe-haven yen soared on Wednesday as investors dumped stocks and unwound carry trades favouring higher-yielding currencies on deepening worries about the global credit crisis.
Federal Reserve Chairman Ben Bernanke's signal that an interest rate cut is coming shortly, along with a new Fed facility to help unfreeze money markets, did little to reassure market players fretting about more trouble ahead. [ID:nCRISIS]
Asian stocks tumbled, with the Nikkei average <.N225> falling over 9 percent, the biggest daily percentage drop since October 1987, when it fell more than 14 percent.
On Tuesday the S&P 500 <.SPX> shed nearly 6 percent and has tumbled almost 20 percent in just seven trading days. [MKTS/GLOB]
The low-yielding yen, once widely used as a source of cheap funds for carry trades, benefited from the unwinding of risky positions.
The dollar fell below 100 yen to a six-month low
The euro fell to a three-year low against the yen of 135.02
As investors rushed to further cut risky positions, the
Aussie hit its lowest in five years against the U.S. currency,
falling as low as $0.6700
The yen and Swiss franc also tend to serve as havens for currency investors in times of financial market turmoil.
"The yen is benefiting from the tumble in stocks and the prevailing 'crisis mode' in the market," said Masafumi Yamanoto, head of foreign exchange strategy for Japan at Royal Bank of Scotland.
"Investor risk aversion and selling of high-yielding currencies are prominent," he said.
The plunge in global stock markets was seen as making a coordinated plan of action by Group of Seven powers or major central banks more likely, some traders said.
The G7 meets on the sidelines of the annual meetings of the International Monetary Fund and World Bank this weekend. Japan said it expects the G7 to send a strong message on stabilising the global financial system.
Hopes have mounted for a coordinated response, either interest rate cuts or some other action such as guaranteeing interbank lending.
The Reserve Bank of Australia's big 100 basis point cut in rates the previous day had stoked views there could be coordinated rate cuts and even gave a boost to the Aussie dollar despite such a large chop in the currency's yield.
"The market seems to need the coordinated central bank rate cuts purely for confidence sake," said Societe Generale's FX sales desk in a note to clients.
The euro fell 0.3 percent at $1.3575
The failure of European leaders to come up with a unified response has spooked investors and undermined the euro. European Union finance ministers agreed on Tuesday to increase minimum levels of bank deposit insurance across the region and recapitalise any vital bank.
But the spreading troubles in Europe engulfed Iceland, which tried to rescue its financial system by taking over the second-largest bank and sought a $5 billion loan from Russia, stirring worries about a potential debt default.
The dollar gained against most currencies as banks have scrambled to pick up the U.S. currency for their funding needs due to the severe strains plaguing the money market, even as Bernanke confirmed that the Fed is prepared to cut rates.
Market players believe the Fed will cut rates before its
meeting later in the month and see a chance of a single cut or
two cuts totalling 75 basis points to 1.25 percent.
Since the collapse of Lehman Brothers, financial institutions have all but stopped lending to each other except on a day-to-day basis because they fear another bankruptcy.
That has spurred the Fed's massive injections of funds into the banking system and its creation of new facilities to revive the commercial paper market, a vital source of short-term funding for banks and companies. (Additional reporting by Chikako Mogi; Editing by Michael Watson)