(Recasts, updates prices)
NEW YORK, Feb 11 (Reuters) - The yen rose broadly on Monday
as investors grew more risk averse while the euro eked out a
small gain against the dollar as the market weighed inflation
remarks from monetary policy-makers.
The euro, coming off its worst week against the dollar in
1-1/2 years, had 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 most of those gains in New York trade as fears
of more credit fallout reinforced views that the ECB will have
to cut interest rates this year.
"The euro is not going to break out of the range it has
held against the dollar since November until the second leg of
the assumption, that the ECB will actually reduce rates, comes
closer to reality," Joseph Trevisani, chief market analyst at
FX Solutions in Saddle River, New Jersey said in a client
note.
Late afternoon in New York, the euro was trading at $1.4523
<EUR=>, up 0.1 percent but off the overnight high of $1.4577,
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, cutting wording about pre-emptive 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.
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 mid-year.
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 0.4 percent to 106.91 yen
<JPY=> and the euro was down 0.3 percent at 155.27 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 1 percent against the U.S. dollar to $0.9041
<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."
(Reporting by Nick Olivari and Steven C. Johnson; Editing by
Neil Stempleman)
