(Recasts, updates prices, adds comments)
By Steven C. Johnson
NEW YORK, Feb 11 (Reuters) - The yen climbed broadly on
Monday as equities softened and investors cut back on risk
while the euro relinquished earlier gains against the dollar as
the market weighed inflation remarks from monetary
policymakers.
The euro, coming off its worst week against the dollar in
1-1/2 years, edged up overnight after European Central Bank
governing council member Axel Weber told a German newspaper the
central bank had not relaxed its view on inflation.
But it pared those gains in early New York trade as fears
of more credit fallout weakened U.S. and European stocks,
lifted the yen and reinforced views that the ECB will have to
cut interest rates later this year.
"They're letting the market know they're still hawkish on
inflation and are not going to cut soon," said Meg Browne,
strategist at Brown Brothers Harriman in New York. "But you can
still read the tea leaves when it comes to growth, so we expect
a rate cut in the second quarter."
By midmorning, the euro had slipped 0.1 percent to $1.4498
<EUR=> after climbing as high as $1.4577 in overnight trade,
according to Reuters data.
The euro struggled last week after the ECB left interest
rates at 4 percent and focused its policy statement on growth
risks and cut wording about preemptive action on inflation.
Weber and ECB President Jean-Claude Trichet have since
tried to refocus markets on euro-zone inflation, which recently
hit a 14-year high.
But analysts said the market was interpreting it all to
mean the bank is moving into a neutral policy stance, a prelude
to an eventual rate cut.
"They're playing the equivalent of 'good cop, bad cop,'
saying they're worried about weak growth but then sending out a
credible figure like Weber to remind markets not to expect rate
cuts this quarter," said CMC Markets analyst Ashraf Laidi, who
said he sees the bank cutting by midyear.
General market unease helped the Japanese currency rise
against the dollar and euro as traders unwound risky trades
financed with cheaply borrowed yen.
The dollar fell 0.8 percent to 106.50 yen <JPY=> while the
euro was down 0.8 percent at 154.45 yen <EURJPY=>.
The weekend Group of Seven industrialized nations meeting
in Tokyo offered little news for foreign exchange markets.
Finance leaders' focus on the crumbling U.S. housing market and
its impact on world economic conditions and bank lending added
to risk aversion on the margins, helping the yen.
The language on currencies was largely a repeat of the
previous statement, with the G7 saying exchange rates should
reflect economic fundamentals. They tweaked comments on China's
yuan to say "we encourage" the need for greater appreciation of
the currency, instead of "we stress."
The Australian dollar was among the best performing major
currencies, rising 0.7 percent against the U.S. dollar to
$0.9022 <AUD=> after the central bank warned it would likely
need to raise interest rates again to counter inflation.
The Reserve Bank of Australia hiked rates to an 11-year
peak of 7 percent last week, and markets now expect another
hike in March.
But strategists said it may be tough for the Aussie dollar
to hold its gains in the current risk-averse environment.
"While we recognize that the RBA hiking rates will increase
the yield advantage of the Australian dollar, it is the
willingness of investors to buy this yield that remains the
main driving factor for the currency," strategists at Barclay's
Capital wrote in a note to clients. "We therefore continue to
expect a weaker Australian dollar going forward, as we continue
to expect weak equity markets ahead."
(Additional reporting by Ian Chua in London; Editing by James
Dalgleish)
