(Recasts, changes byline, dateline, previous LONDON)
By Lucia Mutikani
NEW YORK, Jan 23 (Reuters) - The yen rose across the board
on Wednesday as falling European stocks encouraged investors to
reduce exposure to risky assets and unwind carry trades despite
the Federal Reserve's hefty interest rate cut.
The Fed's 75 basis point reduction of its benchmark
overnight lending rate to 3.5 percent on Tuesday did little to
calm investors' fears of a U.S. recession and its impact on the
global economy, analysts said.
Moves in stock markets are regarded as a barometer of
investors' appetite for risky carry trades, which involve
borrowing in the low-yielding yen to buy higher-yielding
currencies and assets.
European stocks fell sharply on concerns over bank
writedowns and earnings downgrades, while U.S. stock index
futures pointed to another lower open on Wall Street.
"Despite the Fed's move yesterday there is still a great
desire to reduce risk and the way that works in foreign
currency markets is to buy low yielding currencies," said Marc
Chandler, senior currency strategist at Brown Brothers Harriman
in New York.
"The currency markets continue to be dominated by risk
aversion ... people buying the yen, Swiss franc and the
dollar."
In morning New York trade, the dollar was down 1.3 percent
at 105.10 yen <JPY=>, not far from a session low of 104.98 and
its lowest level since May 2005, according to Reuters data. The
euro dropped 1.8 percent to 153.00 yen, while the dollar
slipped 0.6 percent against the Swiss franc to 1.0889 <CHF=>.
Low yielding currencies such as the yen and Swiss franc
tend to attract flows during periods of uncertainty as the low
interest rates reflect the capital surplus of their respective
countries.
The euro was also hurt after euro zone services sector
growth fell below forecasts to a rate not seen in over four
years, adding to the case for an interest rate cut from the
European Central Bank.
Euro zone interest rate futures now expect around 75 basis
points of ECB easing this year from their current 4 percent
level, with the first rate cut expected before June. Futures at
the start of January pointed to the ECB being on hold all
year.
The euro was down 0.5 percent at $1.4555 <EUR=>.
"The key question for the dollar now is whether other
central banks will follow the Fed's aggressive easing lead, as
they did in 2001," said strategists at UBS in a note.
"We believe the Fed's inter-meeting move lends credibility
to our view that G7 decoupling will prove elusive. And we think
the ECB will have to follow the Fed sooner rather than later."
The high yielding Australian dollar fell 0.7 percent to
US$0.8624 <AUD=>, despite a report showing that core inflation
rose at its fastest pace in 16 years last quarter.
The New Zealand dollar tumbled 1.2 percent to US$0.7564
<NZD=>.
(Editing by Chizu Nomiyama)
