* Dollar falls as AIG rescue fails to calm markets
* Risk aversion sees yen reversing earlier losses
* Morgan Stanley, Goldman Sachs shares tumble
(Recasts, updates prices)
By Lucia Mutikani
NEW YORK, Sept 17 (Reuters) - The yen rebounded on
Wednesday as the U.S. government's rescue of insurer AIG and a
jump in interbank borrowing costs failed to calm jittery
markets, lifting the currency to near four month highs against
the dollar.
American International Group's <AIG.N> emergency $85
billion loan from the Federal Reserve did little to ease
investor worries about the U.S. financial sector, with shares
of Wall Street giants Morgan Stanley and Goldman Sachs
tumbling.
"We are still seeing some very nervous markets despite the
best efforts that the government has put forward," said Nick
Bennenbroek, head of currency strategy at Wells Fargo in New
York.
"It looks like there is significant stress in the market in
terms of money market spreads still being wider and U.S. equity
markets under pressure and during these much volatile periods,
its seems to be the yen that's doing the best."
The dollar dropped as low as 104.39 yen <JPY=> at one
point, not too far from nearly four-month troughs seen on
Tuesday around 103.51 yen, according to Reuters data. It was
last down 1.0 percent at 104.68 yen.
The sharp drop in stocks on Wall Street, which was led by
financial shares, saw the euro surrendering earlier gains
versus the Japanese yen. The European single currency was last
down 0.3 percent at 148.00 <EURJPY=>, after earlier climbing to
151.55 yen.
"Risk aversion remains very much in place. In fact, risk
appetite has plummeted this morning with T-bill yields sharply
lower as investors seek safety and liquidity," said Samarjit
Shankar, global foreign exchange strategist at the Bank of New
York Mellon in Boston.
"We are seeing continuing net buying of the yen as a
result, while the Swiss franc also remains net bought."
INTERBANK RATES SPIKE
In a sign of continued distress in financial markets, the
interbank cost of borrowing three-month dollars posted its
biggest daily gain in almost nine years, while the cost of
insuring 10-year U.S. Treasury debt against default rose on
Wednesday to a record high.
A rise in crude oil prices and some unwinding of safe-haven
positions hurt the dollar versus the euro, analysts said.
The euro last traded up 0.2 percent at $1.4148 <EUR=>, but
off session highs around $1.4269, according to Reuters data.
The ICE Futures U.S. dollar index, which measures the
dollar's value against a basket of six currencies, slipped 0.2
percent to 78.974 <.DXY>.
"The dollar had benefited from safe-haven capital flows
into U.S. Treasuries and we are seeing a little bit of an
unwinding of that," said said Omer Esiner, a senior currency
analyst at Ruesch International in Washington.
The dollar was mute to data showing that construction
starts on new U.S. homes plunged to a 17-1/2-year low in August
and the current account deficit widened in the second quarter.
For details see [].
The U.S. Federal Reserve elected to leave interest rates on
hold on Tuesday at 2 percent, citing concerns about downside
risks to growth and upside risks to inflation.
Elsewhere, Britain's economic backdrop continued to show
deterioration with data released earlier showing that the
numbers of jobless in Britain leapt by 32,500 in August, its
biggest rise since December 1992.
The euro rose 0.2 percent to 79.00 pence <EURGBP=>, while
sterling gained 0.3 percent to $1.7914 <GBP=>.
Minutes of the Bank of England's latest policy meeting
showed 8 of 9 policymakers voted to leave borrowing costs on
hold at 5 percent, with one policymaker calling for a 50 basis
point cut while a hike was also discussed.
(Editing by Chizu Nomiyama)
