Dollar, yen rise as global economic fears deepen

NEW YORK (Reuters) - The U.S. dollar and the yen rose on Monday, benefiting from safe-haven flows after weak economic data heightened fears about a deep economic slowdown around the world.

The yen was broadly higher, reaching a one-month high versus the dollar as plunging equity prices prompted investors to reverse risky trades. The yen performed best against currencies of countries where central banks are expected to slash interest rates later this week, including the euro, sterling, and the Australian and New Zealand dollars.

"The yen remains relatively strong across majors and that has a lot of to do with the risk sentiment that we're seeing in the market," said Terri Belkas, currency strategist at DailyFX.com in New York.

The slumping stock market "is really helping to drive a lot of deleveraging, which tend to benefit the yen the most," she added. "If equities and other risky assets continue to take a hit, the Japanese yen could easily take its late-October highs."

The U.S. economy slipped into recession in December 2007, the National Bureau of Economic Research's business cycle dating committee, the arbiter of U.S. recessions, said Monday.

Comments from Federal Reserve Chairman Ben Bernanke also fueled pessimism. He said the U.S. economy remained under considerable strain and the Fed would also use other unconventional measures to aid growth as interest rates approach zero.

In late trading in New York, the dollar was down 2.4 percent against the yen at 93.18 yen, after hitting a low of 93.06 yen earlier, the weakest level since October 28.

The euro also tumbled against the yen, dropping 3 percent to 117.59 yen. Against the dollar, the euro fell 0.6 percent to $1.2619.

The ICE Futures' dollar index, which tracks the value of the greenback against a basket of six currencies, rose 0.5 percent to 86.982 .DXY.

"The dollar is still trading off bad economic news, risk aversion, and repatriation flows," said Michael Woolfolk, senior currency strategist, at Bank of New York Mellon in New York. "The respite we saw in dollar buying late last week has faded."

GLOBAL ECONOMY, RATES FOCUS

Worries over the global economy intensified after data showed sharp declines in U.S., European and Chinese manufacturing activity.

U.S. factory activity dropped in November to its weakest level since the 1981-1982 recession and construction spending slumped in October, data showed on Monday, fanning fears of a protracted economic downturn.

Falls in the euro and other European currencies also accelerated after manufacturing activity in the euro area, which has already entered recession, hit a record low in November. China's manufacturing industry slumped as well.

Sterling was off 3.4 percent against the dollar at $1.4870, with losses exacerbated after data showed UK manufacturing activity had shrunk at a record pace.

As the global economy slows, the Bank of England, the European Central Bank, the Reserve Bank of Australia and the Reserve Bank of New Zealand are all expected to cut rates by at least half a percentage point, diminishing the yield advantage of their currencies over the ultra-low yielding yen.

"Evidence continues to build suggesting these central banks have further aggressive monetary easing to undertake...to stem the risks of a dramatic shift in price expectations going forward," said Bank of Tokyo Mitsubishi in a research note.

Yen crosses reflected those expectations, with sterling/yen, Australian dollar/yen and New Zealand dollar/yen all down sharply on the day.

(Additional reporting by Gertrude Chavez-Dreyfuss and Nick Olivari and Steven C. Johnson; editing by Leslie Adler)