* Dollar firms despite receding risk concerns
* Repatriation moves underpin dollar demand
* Weak global growth, rate cut expectations support dollar
* Yen gains vs Aussie, euro as investors take profit
By Chikako Mogi
TOKYO, Oct 21 (Reuters) - The dollar held near a 16-month
high against a basket of currencies on Tuesday, benefiting from
worries over a deterioration in the global economy.
The U.S. currency edged up as traders cited ongoing demand
from banks picking up dollars for their funding needs, as well as
some speculation that market players needed to acquire dollars to
settle credit derivatives tied to the bankruptcy of Lehman
Brothers.
The dollar got a boost from Federal Reserve Chairman Ben
Bernanke's testimony to Congress on Monday endorsing more
government spending to stimulate the U.S. economy.
A bleak outlook on the global economy and expectations for
more monetary easing worldwide have hurt currencies such as the
euro, with the European Central Bank seen having more scope for
aggressive rate cuts.
By contrast, the Fed is not expected to cut rates much more
from the already low 1.5 percent.
Tight credit conditions and slumping stock markets had helped
bolster demand for the dollar as a save-haven currency, along
with the yen as market players have dumped highly leveraged carry
trades and positions across markets.
"Behind the dollar's strength there is still a desire among
market players to boost cash holdings in the U.S. currency due to
lingering concerns about counterparty risks," said Masaki Fukui,
a senior market economist at Mizuho Corporate Bank.
"The strength in the dollar could persist until the end of
the year," Fukui said.
The dollar index, which measures the U.S. currency's value
against a basket of six currencies, edged up 0.1 percent to 83.07
<.DXY> and near a 16-month high of 83.23 on Monday.
The euro eased 0.2 percent to $1.3316, <EUR=> slipping from
an earlier high of $1.3358, and was likely to be weighed down by
deteriorating economic conditions in the euro zone and concerns
about European banks' health, traders said.
Some traders were wary of a deeper drop in the euro, as the
market seemed ready to test lows of $1.3258 and 132.15 yen.
The dollar fell 0.3 percent against the yen to 101.60 yen,
<JPY=> slipping from an earlier high of 102.16 yen, with traders
expecting the pair to stay in a 101.50-102.50 yen band on
Tuesday.
As financial markets regain some stability, investors' focus
is shifting from fears of the worst of the credit crisis to
economic fundamentals and monetary policy, traders said.
Bernanke said the economy was expected to be weak for several
quarters and there was some risk of a protracted slowdown.
[]
Fed policymakers meet next Tuesday and Wednesday, and
economists and investors widely expect another rate cut.
The yen climbed against the euro and the Australian dollar as
traders cited profit-taking pulling the pairs lower. Traders also
said the yen's gains were due to Japanese investors selling
foreign assets and repatriating funds.
The euro fell 0.5 percent to 135.26 yen. <EURJPY=R>
The Aussie extended losses, falling 2.2 percent against the
yen <AUDJPY=R> on expectations for more rate cuts by the Reserve
Bank of Australia, as well as profit-taking, traders said.
RBA minutes from its meeting earlier this month indicated
there was more room for rate cuts, though not as aggressive as
this month's 100 basis point cut. []
"The correlation between stock gains and the strength in
emerging or resource currencies is less clear-cut, suggesting the
market sees the current improvement in sentiment as just a
temporary correction to excessive risk aversion during the panic
phase of the credit crisis," said a senior dealer at a Japanese
trading firm.
The yen will likely stay firm as expected global rate cuts
shrink yield advantages and prevent high-yield pairs from
rebounding, keeping carry trades out of favour, he said.
(Additional reporting by Rika Otsuka; Editing by Michael
Watson)
