Yen rallies in London

The yen rallied and high-yielding currencies fell on Wednesday as investors became more risk averse after rumours of conflict between the United States and Iran.
Although Washington dismissed the rumour the geopolitical jitters prompted a sharp spike in the oil price and falls in equities, prompting investors to unwind risky carry trades, financed in the low-yielding yen to invest in higher yielding currencies such as the Australian and New Zealand dollars.
The US Navy said it had no information about rumours that Iran had fired at a US naval vessel in the Gulf. Separately, Britain's Ministry of Defence denied a rumour that Britain had sent troops to rescue 15 sailors held in Iran. The focus later turned to US durable goods data and a speech by Federal Reserve chairman Ben Bernanke later.
"There was overnight concern on the whole Iran situation and we had oil prices go up substantially and stocks falling. The yen is closely tied to the fortunes of stock markets - when stocks fall the yen does pretty well," said Tom Levinson, currency strategist at ING.
"Bernanke is speaking specifically on housing. He mostly is likely to say there are concerns on the subprime but the Fed doesn't expect this to spread to other part of the economy. There will be slight net dollar negative risks around Bernanke."
By 1130 GMT the yen was up half a percent at 117.23 yen having earlier hit a one-week high of 117.10 yen. The euro was down 0.6 percent at 156.40 yen, retreating from Tuesday's one-month high of 158.03.
The high-yielding Australian and New Zealand dollars fell 0.2 and 0.5 percent versus the greenback, respectively. The euro was down 0.1 percent at $1.3340. The Swiss franc rose against the euro but held steady versus the dollar after Switzerland's KOF indicator of business expectations rose to a higher-than-expected 1.9 in March.
Yield differentials and economic fundamentals are likely to come back into focus later in the session when testimony from Bernanke could shed light on the likelihood of a near-term US interest rate cut from the current 5.25 percent.
Such expectations have been boosted this week by softer-than-forecast US consumer confidence data and lingering worries about a slowing housing market.
Investors are looking to see what Fed's Bernanke tells Congress about the wider economic impact from the growing troubles in the subprime mortgage sector. "Bernanke speaking of subprime will be important. I think (the risk is) to the downside if he confirms the view the tightening bias is out," said Antje Praefcke, currency strategist at Commerzbank in Frankfurt.
The testimony comes a week after the Fed dropped a reference made at its previous meeting in January to the possible need for "additional firming" of monetary policy from its post-meeting statement after keeping rates unchanged.
In Europe, investors are expecting the European Central Bank to raise interest rates again to 4 percent later this year. ECB's executive board member Manuel Gonzalez-Paramo added to a recent hawkish tone of ECB officials, saying that there are medium-term risks to inflation.