Yen falls after Fed injections calm credit fears
NEW YORK (Reuters) - The yen slipped against both the dollar and the euro after the U.S. Federal Reserve injected cash into the banking system three times on Friday, easing U.S. stock market losses and calming anxious financial markets.
Global central banks, including the European Central Bank and the Bank of Japan, added more than $300 billion of extra cash to the banking system over the last 48 hours to stabilize credit markets.
"Central banks like the Fed and ECB are adding liquidity, and that has done a lot to calm the markets," said Rafael Martorell, chief dealer at BNP Paribas in New York.
That helped U.S. stocks recover from an early plunge, sending currency traders rushing to sell their newly acquired yen.
Recently, the Japanese currency has slipped when equity markets rose because investors could borrow in low-yielding yen to finance purchases of other risky assets. When stocks slid, the yen firmed as investors unwound those carry trades and bought back yen.
In late New York trade, the dollar was up 0.3 percent at 118.48 yen, more than 1 yen above a low touched earlier in the session. The greenback also rose 0.2 percent against the Swiss franc to 1.1960 francs.
The euro was up 0.2 percent on the day against the dollar at $1.3697, still well below a record high of around $1.3850 hit last month. It was up 0.45 percent against the yen at 162.30 yen.
INTERNATIONAL CREDIT WORRIES PERVADE TRADING
A crisis that began with losses in the U.S. subprime mortgage market became a worldwide flight from risk this week. Equities tumbled, government bonds rallied and expectations of global central bank rate hikes were scaled back.
On Friday, the Fed injected $38 billion of funds into the banking system in three operations and said it was ready to supply funds as needed to financial markets -- the first such reassurance from the central bank since the terror attacks of September 11, 2001.
Despite the Fed's actions, two of the three major U.S. equity indexes finished the day down, with the Dow Jones industrial average .DJI falling 0.23 percent, recovering somewhat from midday lows more than 2 percent below the open.
Despite continued equity weakness, the yen didn't regain its footing.
"Currency market participants are squaring their positions," said Samarjit Shankar, director of global strategy at Bank of New York Mellon. "You are seeing some decoupling between the equity market positioning going into the weekend."
Despite the day's volatile shifts, Shankar expected more gains in the yen next week.
"As long as equities remain under pressure, we expect to see the yen getting stronger. It is because of more risk aversion and concerns about liquidity," he added.
Also on Friday, the federal funds rate rose as high as 6 percent -- well above the Fed's target of 5.25 percent -- prompting the central bank to inject temporary reserves into the banking system.
Overnight interest rates in the euro zone and the United States spiked this week as financial institutions scrambled for cash due to the credit market turmoil.
The credit market problems prompted the market to price in a quarter-percentage-point Fed rate cut by September.
Traders are also betting on a less than 50/50 chance that the ECB will raise interest rates next month, down from a 70 percent chance at the beginning of this week. They put the chance that the Bank of Japan will tighten monetary policy this month at one in three, compared with 75 percent previously.
(Additional reporting by David McMahon and Gertrude Chavez-Dreyfuss)