(Adds comments, updates prices, changes byline)
By Vivianne Rodrigues
NEW YORK, Jan 23 (Reuters) - The yen gained across the
board on Wednesday as another day of sharp losses in U.S.
stocks drove investors to reduce exposure to riskier assets
despite the Federal Reserve's hefty interest rate cut on
Tuesday.
The Fed's 75-basis-point reduction in its benchmark
overnight lending rate to 3.5 percent 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
appetite for carry trades, which involve borrowing in the
low-yielding yen to buy higher-yielding currencies and assets.
"It's the carry trade in full swing here," said Mark
Meadows, a strategist at Tempus Consulting in Washington, D.C.
"The yen is the main beneficiary and is trading in an inverse
correlation with U.S. stocks."
U.S. stocks fell for a sixth day, tracking declines in
Europe as investors continued to fret about a possible
recession in the world's largest economy and grumble that
European central banks have given no indication they intend to
follow the Fed's rate cut.
The dollar dived to 104.98 yen, its lowest level since May
2005, according to Reuters data. It was last trading down 1.1
percent at 105.38 yen <JPY=>.
"The yen is trading inversely to stocks. There are lots of
short yen positions that could still be covered and that could
drive the yen higher and other currencies lower against the
yen," said David Gilmore, partner at FX Analytics in Essex,
Connecticut.
The euro dropped 1.5 percent to 153.43 yen <EURJPY=>, but
off a session low of 152.81. The dollar slipped 0.4 percent
against the Swiss franc to 1.0907 <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.
DESIRE TO REDUCE RISK
"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.
Analysts said given lingering economic growth worries and
prospects of further rate cuts by the Fed, there was scope for
the yen to rise further against the dollar. The steepening U.S.
Treasury yield curve was also driving the pair, they noted.
"The steepening of the U.S. yield curve will provide the
yen with further support as the hedging of U.S. assets by
Japanese investors becomes more attractive," said FX
strategists at BNP Paribas.
The spread between yields on the two-year Treasury note and
the 30-year government bond has widened to about 226 basis
points so far this year, from 140 basis points at the end of
2007.
Analysts said investors were also disappointed that other
central banks, particularly the European Central Bank, had not
followed the Fed's emergency interest rate cut.
News that euro zone services sector growth fell below
forecasts to a more than four-year low added to pressure on the
euro, as it backed the case for an ECB rate cut.
Euro zone interest rate futures reflect expectations of
around 75 basis points of ECB easing this year from the 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 $1.4572 <EUR=>. The
high-yielding Australian dollar fell 0.2 percent to US$0.8662
<AUD=>, despite a report showing that core inflation rose at
its fastest pace in 16 years the past quarter.
(Additional reporting by Lucia Mutikani in New York; Editing
by Leslie Adler)
