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Yen rallies, dollar dented on financial mkt fears

LONDON - The dollar slipped on Thursday, weighed down by persistent concern over the U.S. financial system that also triggered a broad unwind of so-called "carry trades", pushing the Japanese yen sharply up across the board.

A rise of over 1 percent in oil prices stoked the broadly negative dollar sentiment already bubbling on fears over the viability of U.S. mortgage giants Fannie Mae and Freddie Mac, and investment bank Lehman Brothers.

The Financial Times said on Thursday that Lehman -- which some analysts say could soon announce writedowns of up to $4 billion -- held talks to sell 50 percent of its shares to China's CITIC Securities and state-owned Korea Development Bank but both firms walked away, saying the price was too high.

A Lehman spokeswoman declined to comment on the report.

Renewed worries about one of Wall Street's most venerable banks and broad increase in risk aversion pushed the dollar further down from its 2008 highs struck earlier this week but boosted the yen.

"There is some jitteriness in financial markets and in equity markets ... and that tends to mean the yen is a bit better supported against some of the more risky currencies," said Phyllis Papadavid, currency strategist at Societe Generale in London.

"Especially with some of the stories surrounding U.S. banks ... there is that sense of risk aversion seeping into the markets."

At 1115 GMT the dollar was down 1 percent against the yen at 108.65 yen.

This was the main driver of a 0.3 percent fall in the dollar index -- a measure of the dollar's value against a basket of six major currencies -- to 76.70.

The euro was down 0.8 percent against the yen at 160.60 yen , but was up 0.2 percent versus the dollar at $1.4775.

Relatively high-yielding and "riskier" currencies like the Australian and New Zealand dollars were off sharply against the yen, losing 1.5 percent to 94.35 yen and 1 percent to 77.34 yen respectively.

Data focus on claims

In nervous and volatile financial markets, investors tend to shun carry trades. These trades involve selling low-yielding currencies (like the yen) for higher-yielding ones, which offer higher interest rates because they generally carry more risk in terms of growth, inflation or credit risk.

In addition to Lehman, investors are looking at developments surrounding Fannie and Freddie. Their shares plunged on Wednesday to their lowest level in almost 20 years on growing expectations of a government bailout, which would wipe out shareholders.

Data earlier this week showed that the battered U.S. housing market, at the heart the root of the global financial crisis, is still some way from sustained recovery.

Asian and European equities fell on Thursday, and U.S. futures point to a lower open on Wall Street. In commodity markets, oil jumped 1.5 percent to $117.30 a barrel and gold was up 1.5 percent at $825 an ounce.

These factors were having more influence on currencies than macroeconomic or growth indicators, as seen by the yen's rally despite Japan's trade surplus in July shrinking to its smallest in four months.

Still, the latest weekly U.S. jobless claims and the Philadelphia Federal Reserve's snapshot of factory activity in August could provide further clues on the U.S. labour market and economy, giving equities and currencies some direction.

"Whilst financial market events will once again dominate near-term sentiment, the U.S. weekly initial claims and Philly Fed index will also provide a test of dollar resilience to data," JP Morgan said in a note on Thursday.

Claims are seen holding well above the key 400,000 level.

Earlier, the euro drew little clear direction from purchasing managers index figures and sterling's reaction to a surprise rise in UK retail sales last month was brief.