FOREX-Yen up as bank sector jitters suppress risk appetite

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By Simon Falush

LONDON, Jan 11 (Reuters) - The yen gained broadly and the high yielding pound fell to fresh lows on Friday as renewed worries about U.S. financial institutions' losses from credit market turmoil and falling equities eroded risk appetite.

The New York Times reported that Merrill Lynch was expected to suffer $15 billion in losses from soured mortgage investments and that it was trying to raise additional capital from an outside investor.

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This news contributed to a fall in Asian equities while European stocks hit their lowest level in nearly five months.

The rise in risk aversion made investors less willing to hold relatively risky carry trade bets where cheap borrowing in the yen and Swiss franc funds purchases of high yielding currencies.

"Everything (in equity markets) seemed to turn negative which says an awful lot about the lack of risk appetite and the yen's performance is consistent with that," said Simon Derrick, head of currency research at Bank of New York Mellon.

By 1110 GMT the yen gained around a third of a percent to 109.00 per dollar JPY=. It also rose 0.6 percent to 161.01 per euro EURJPY=.

Tokyo financial markets will be closed on Monday for a national holiday.

Sterling fell to a fresh record low versus the euro EURGBP= and dipped below $1.95 to a 10-month low against the dollar GBP= as weak industrial output data confirmed investor expectations that the Bank of England would cut rates next month after leaving them at 5.50 percent on Thursday.

The low yielding Swiss franc rallied to 1-1/2 month highs versus the dollar CHF= and five-month peaks against the euro EURCHF=, though it subsequently retreated a little.

The euro fell 0.2 percent to $1.4773 EUR=.

DIVERGENT RATE PATHS

The dollar tumbled against the euro on Thursday when comments by Federal Reserve Chairman Ben Bernanke suggested an aggressive half-percentage point rate cut could be made at its meeting on interest rates later in the month.

"The speech suggests that the FOMC will adopt an outright easing bias at the next meeting, signalling more easing ahead," said Danske bank in a note to clients.

"With this far more open-ended communication, the Fed will probably continue to ease policy until some signs of stabilisation show up in the data."

Danske thinks the Fed will cut by 50 basis points in January from 4.25 percent and make further cuts to 3 percent by the June meeting.

Bernanke's comments contrasted with those of European Central Bank President Jean-Claude Trichet, who emphasised an inflation-fighting stance and said its policy position was not neutral.

A half percentage point cut in overnight rates by the Fed this month would take U.S. rates to 3.75 percent, below the ECB's 4.0 percent level and reduce the attraction of U.S. assets for some investors.

The U.S. trade deficit, due at 1330 GMT, is expected to widen to $59.10 billion, its biggest since July, and could lead to further dollar weakness.

"We look for high oil prices to add some $5 billion to the monthly import bill, more than offsetting an increase in export demand," ING bank said in a note to clients.

"Should our below consensus -$61 billion (forecast) prove accurate, the euro may test $1.4825 and possibly $1.4900 in coming days."