Dollar, yen buoyed by flight to safety

TOKYO (AFP) - The dollar and the yen both benefitted from a flight to safety in Asian trade Friday as worries about problems in the US mortgage sector hammered global stock markets, dealers said.

They said that news that the Eurozone and Japanese central banks had injected large amounts of cash into the financial system to try to stabilise money market interest rates had added to the sense of nervousness.

They said the dollar was supported by its status as a safe-haven during times of financial instability, while the yen was boosted by the unravelling of the high-risk carry trades funded by selling the Japanese currency.

As a result the dollar was steady at 118.12 yen in Tokyo afternoon trade, off an early low of 117.72 but little changed from 118.17 in New York late Thursday.

The euro was down against both of its two major rivals, falling to 161.32 yen from 161.61, and to 1.3661 dollars from 1.3673.

The Japanese currency was supported by growing risk aversion, said Kenichi Yumoto, vice head of forex sales at Societe General in Tokyo.

"The yen is firm as other currencies are sold" to unwind the high-risk carry trade, he said.

Carry trade is when investors borrow currency in countries with low interest rates, such as Japan, before using it to buy assets in countries with higher interest rates, such as Britain, Australia or New Zealand.

The Australian and New Zealand dollars were both under pressure Friday as investors scaled down risky positions.

The yen was also supported by the view that Japanese financial firms' exposure to the subprime woes is smaller than that of their US and European counterparts, said Yumoto.

"Japanese banks are still operating in a somewhat closed world. They were not active in advancing into risky financial products such as subprime loans, which turned out to be good for them retrospectively," he added.

The Bank of Japan injected one trillion yen (8.5 billion dollars) into money markets Friday to try to ease a liquidity squeeze but the move failed to staunch sharp losses in domestic share prices.

The European Central Bank on Thursday injected a record 94.8 billion euros (130.2 billion dollars) into the eurozone banking market, while the US Federal Reserve made 24 billion dollars available to commercial banks.

The downturn in global stock markets began Thursday in Europe when French bank BNP Paribas announced it had suspended three funds exposed to troubles in the US subprime mortgage sector.

"Risk aversion (is) back on the agenda," noted Barclays Capital currency analysts.

"Higher levels of risk aversion saw about two percent losses in most European and North American bourses overnight and the yen strengthen against all of the majors as carry trades were unwound," they added.

The dollar rose against all major Asian currencies.

It firmed to 1.5207 Singapore dollars from 1.5104 on Thursday, to 9,350.50 Indonesian rupiah from 9,283.50 and to 45.73 Philippine pesos from 45.14.

The dollar also strengthened to 930.50 South Korean won from 923.05, to 31.34 Thai baht from 30.83 and to 32.94 Taiwan dollars from 32.87.