Dollar advances versus yen

The dollar advanced against the yen on Wednesday after the Federal Reserve rescued insurer American International Group, easing fears about a financial system crisis. The Fed said it would lend up to $85 billion to AIG, once the largest insurer in the world, in a two-year plan aimed at saving it from a "disorderly failure" that could damage the global economy.
The move eased worries about the stability of the US financial system and helped high-yielding currencies like the Australian dollar to rebound from multiyear lows against the yen, which was favoured at a time of heightened risk aversion. "Liquidity conditions in the market have become so severe," said Hideki Amikura, deputy general manager of the forex section at Nomura Trust Bank.
"And that may have forced US officials to rescue the insurance company, despite some views that such action would involve moral hazard," Amikura said. After the collapse of Lehman Brothers, which did not get funding assistance from the US government, investors had feared AIG would suffer a similar fate and exacerbate the turmoil in global markets.
The dollar jumped as high as 106.72 yen on trading platform EBS, extending Tuesday's sharp rise from a four-month low of 103.54 yen. It later pulled back to 106.18 yen for a gain of 0.5 percent on the day.
The greenback trimmed some of its gains after CNBC reported on its website that officials at US investment bank Morgan Stanley were weighing whether the firm should retain its independence or merge with a deposit-taking bank give the recent turbulence in its share price.
The euro rose 0.8 percent to 150.75 yen after shooting up more than 1 percent to above 151.50 yen at one stage. The euro's sharp gain versus the yen contributed to its 0.5 percent rise against the dollar to $1.4194. AIG's rescue is the latest event in what has already been one of the most tumultuous weeks ever in financial markets. Merrill Lynch agreed on Monday to be bought by Bank of America for $50 billion.
Yet the overall market remains fragile as tightness in US dollar funding persisted in Asia on Wednesday, underscoring the fact that uncertainty remains about the health of the financial system, traders said. "The fact that banks are still distrustful of lending to each other suggests that US companies may be facing more difficulty in getting funds from banks, hurting the broad economy," said Hiroshi Yoshida, a trader at Shinkin Central Bank.