* Yen soars, hits 6-mth high vs dollar, 3-yr peak vs euro
* World stocks tumble, Nikkei worst fall since 1987 crash
* Bernanke rate cut signal fails to soothe nerves
By Eric Burroughs
TOKYO, Oct 8 (Reuters) - The safe-haven yen soared on
Wednesday as investors dumped stocks and unwound carry trades
favouring higher-yielding currencies on deepening worries about
the global credit crisis.
Federal Reserve Chairman Ben Bernanke's signal that an
interest rate cut is coming shortly, along with a new Fed
facility to help unfreeze money markets, did little to reassure
market players fretting about more trouble ahead. []
Asian stocks tumbled, with the Nikkei average <> falling
over 9 percent, the biggest daily percentage drop since October
1987, when it fell more than 14 percent.
On Tuesday the S&P 500 <.SPX> shed nearly 6 percent and has
tumbled almost 20 percent in just seven trading days. []
The low-yielding yen, once widely used as a source of cheap
funds for carry trades, benefited from the unwinding of risky
positions.
The dollar fell below 100 yen to a six-month low <JPY=> of
99.61 yen <JPY=> while the Australian dollar fell 6 percent
against the yen to 67.44 yen <AUDJPY=R>. On Monday the Aussie
plunged 11 percent against the yen in panic selling.
The euro fell to a three-year low against the yen of 135.02
<EURJPY=R>.
As investors rushed to further cut risky positions, the
Aussie hit its lowest in five years against the U.S. currency,
falling as low as $0.6700 <AUD=D4>.
The yen and Swiss franc also tend to serve as havens for
currency investors in times of financial market turmoil.
"The yen is benefiting from the tumble in stocks and the
prevailing 'crisis mode' in the market," said Masafumi Yamanoto,
head of foreign exchange strategy for Japan at Royal Bank of
Scotland.
"Investor risk aversion and selling of high-yielding
currencies are prominent," he said.
The plunge in global stock markets was seen as making a
coordinated plan of action by Group of Seven powers or major
central banks more likely, some traders said.
The G7 meets on the sidelines of the annual meetings of the
International Monetary Fund and World Bank this weekend. Japan
said it expects the G7 to send a strong message on stabilising
the global financial system.
Hopes have mounted for a coordinated response, either
interest rate cuts or some other action such as guaranteeing
interbank lending.
The Reserve Bank of Australia's big 100 basis point cut in
rates the previous day had stoked views there could be
coordinated rate cuts and even gave a boost to the Aussie dollar
despite such a large chop in the currency's yield.
"The market seems to need the coordinated central bank rate
cuts purely for confidence sake," said Societe Generale's FX
sales desk in a note to clients.
The euro fell 0.3 percent at $1.3575 <EUR=>, holding above a
13-month low of $1.3444 struck on Monday.
The failure of European leaders to come up with a unified
response has spooked investors and undermined the euro. European
Union finance ministers agreed on Tuesday to increase minimum
levels of bank deposit insurance across the region and
recapitalise any vital bank.
But the spreading troubles in Europe engulfed Iceland, which
tried to rescue its financial system by taking over the
second-largest bank and sought a $5 billion loan from Russia,
stirring worries about a potential debt default.
The dollar gained against most currencies as banks have
scrambled to pick up the U.S. currency for their funding needs
due to the severe strains plaguing the money market, even as
Bernanke confirmed that the Fed is prepared to cut rates.
Market players believe the Fed will cut rates before its
meeting later in the month and see a chance of a single cut or
two cuts totalling 75 basis points to 1.25 percent. <FEDWATCH>
Since the collapse of Lehman Brothers, financial institutions
have all but stopped lending to each other except on a day-to-day
basis because they fear another bankruptcy.
That has spurred the Fed's massive injections of funds into
the banking system and its creation of new facilities to revive
the commercial paper market, a vital source of short-term funding
for banks and companies.
(Additional reporting by Chikako Mogi; Editing by Michael
Watson)
