Yen outshines rivals amid stock market turmoil

TOKYO (AFP) - The resurgent yen showed signs of stabilising at 14-month highs against the dollar in Asian trade Friday after players scrambled to exit risky bets due to the rout on global markets, dealers said.

Days of turmoil on stock markets have lifted the Japanese currency as speculators unwound so-called "carry trades," in which they borrowed currencies with low interest rates, such as the yen, to buy those with higher yields.

The higher-yielding currencies continued to drop Friday, with the Australian dollar sinking to a fresh five-month low against the yen.

"The market is in a state of panic with investors continuing to reduce risk with no idea when this is going to stop nor how serious the problems are," said Kikuko Takeda, currency research manager at the Bank of Tokyo-Mitsubishi UFJ.

Global stock markets have taken a beating amid concerns about housing loans in the United States to "subprime" customers, or those with patchy credit histories.

The dollar slipped to 113.71 yen in Tokyo morning trade from 113.86 in New York late Thursday. Such levels have not been seen since June 2006, although the dollar recovered from the 112 range seen in New York trade.

The single European currency slipped to 152.68 yen from 152.85, staying at 10-month lows.

The US dollar's modest rebound came as investors fled to the safety of US Treasury bonds.

"The market is currently squirreling away cash under the mattress. The irony is that it is squirreling cash under the house that is actually burning," said Robert Rennie, head of foreign exchange strategy at Westpac Banking Corp.

For much of this year, it was the yen that came under relentless selling by carry traders.

But that high-risk investment strategy is suddenly being shunned due to the anxiety over default housing loans in the United States.

In the latest developments, markets were spooked by a government report revealing a sharp drop in new home-building activity across the United States and news that leading lender Countrywide Financial borrowed 11.5 billion dollars to bolster its finances.

The Bank of Japan on Friday injected emergency funds of 1.2 trillion yen (10.5 billion dollars) into the financial system, although it did little to quell investor sentiment, dealers said.

The US Federal Reserve pumped in 17 billion dollars in its latest move Thursday.

Meanwhile, there is mounting speculation about whether the Fed may even cut rates next month to ease investors' fear of a credit crunch.

"The Fed's stance is changing," said Takeda of Mitsubishi-UFJ, noting that the Fed funds rate -- the rate banks use to lend money to each other -- has traded below its target rate of 5.25 percent in recent days.