The Australian dollar recovered from recent lows against the yen and US dollar on Wednesday on investor relief after the US government bailed out the beleaguered American Insurance Group (AIG). But fresh worries stemming from rumours that more US financial institutions could be in trouble kept investors cautious.
"The Aussie is grinding a bit higher, given that this move by the Fed is a positive one and has provided investors some relief," said Richard Grace, senior currency strategist at Commonwealth Bank. "But fresh risk aversion, rumours about an investment bank merging, are all bearing down on appetite for riskier assets."
The yen trimmed losses after CNBC reported that Morgan Stanley officials were weighing whether the firm should remain independent or merge, given the recent turbulence in the company's stock. Earlier, the US government agreed to lend $85 billion to prevent AIG from collapsing, soothing edgy investors digesting the bankruptcy of investment bank Lehman Brothers earlier this week.
The collapse of Lehman and the take-over of Merrill Lynch by Bank of America sent shockwaves across the globe, forcing investors to shed risky investments, and rush to the relative safety of government bonds and low-yielding currencies like the yen.
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