Yen trims gains after jumping on risk aversion

The yen hit a three-month high against the dollar and a six-week high versus the euro on Friday as a sell-off in credit and stock markets forced investors to cut back on risky carry trades.
But the yen quickly gave up gains, with the high-yielding Australian and New Zealand dollars rising sharply as Japanese investors took the yen's rally as an opportunity to buy foreign currencies and assets.
"Players such as importers, institutional investors and brokerage houses were selling the yen en masse, and there were some investment trust launches as well," said Akira Kato, senior manager for Bank of Tokyo-Mitsubishi UFJ. "It's not just in dollar/yen but also Aussie/yen, euro/yen, and sterling/yen. There's been yen-selling on all the cross/yen pairs that were hit the hardest yesterday," Kato said.
The dollar hit a fresh three-month low against the yen at 118.02 yen on electronic trading platform EBS in early Asian trade before recovering to around 118.95 yen.
Traders also booked profits on the yen's initial surge, which came after US equities fell sharply on Thursday, as a big widening in credit spreads stoked fears that problems in the subprime mortgage market may lead to a severe credit crunch.
Traders said more sell-offs in global equity and credit markets would likely spark more uunwinding of yen carry trades. "The situation is no longer like, you are OK as long as you are selling the yen," said Shuichi Kanehira, senior vice president in the forex division at Mizuho Corporate Bank.
The Nikkei stock average tumbled 2.7 percent after US equities fell sharply on Thursday, partly on worries about deteriorating conditions for corporate buyouts.
Chrysler Group's announcement this week of a postponement of a $12 billion loan to finance a private equity take-over has fanned concern that the environment for deal financing may be getting tougher.
In carry trades, investors use the low-yielding Japanese currency to fund purchases of higher-yielding currencies. But spikes in market volatility threaten that strategy of profiting on interest-rate differentials.
The euro fell as low as 162.25 yen, the lowest level since mid-June, before rebounding to 163.50 yen. The euro was steady from late US trading on Thursday at $1.3743, off a $1.3853 record hit earlier in the week.