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FOREX-Dollar, yen soar as anxiety over crisis mounts

Reuters - Tuesday, October 7

* Dollar scales 13-month high vs euro, yen surges broadly

* Lack of coordinated European response rattles investors

* Dow marks lowest close since October 2004

By Lucia Mutikani

NEW YORK, Oct 6 - The U.S. dollar scaled a fresh 13-month peak versus the euro on Monday, while the yen surged broadly as investors dumped risky assets amid anxiety over the lack of a coordinated global response to the credit crisis.

Traders drove the euro below $1.35 to the dollar, taking a dim view of a weekend decision by leaders of Europe's four biggest economies against a coordinated bailout plan. In addition, European governments were forced to rescue large banks and protect ordinary depositors.

The heightened risk aversion, which saw heavy selling of stocks globally, put the yen on track for its largest one-day gain versus the dollar since the Asian crisis in 1998, and its strongest day against the euro since the launch of that currency in 1999.

Both the dollar and the yen rallied sharply against higher-yielding currencies such as the Australian and New Zealand dollars as investors sought cover from the storm engulfing financial markets.

"Everybody is running for the dollar as a safe-haven proxy right now simply because a lot of the short-term paper like U.S. Treasury bills are dollar-denominated and that's where everybody wants to park their money," said Boris Schlossberg, director of FX research at GFT Forex in New York.

"The dollar seems to be in very short supply. Overnight Libor rates are 200 basis points above where they should be. It doesn't look like the pressure is going to be relieved until we get some kind of a coordinated global response."

Analysts have been speculating this coordination could take the form of major central banks cutting interest rates.

The euro tumbled to $1.3444 <EUR=>, its lowest since late August 2007, according to Reuters data. In late New York trade, it was last down 1.7 percent at $1.3536.

Against the yen, the euro dived to 135.03 yen <EURJPY=>, a three-year low, according to Reuters data. It was last down 4.8 percent at 138.02 yen.

EUROPEAN BANKS HAMMERED

"What's been driving the market ... over the past couple of weeks has been concern about the disintegration in the European financial system," said Todd Elmer, currency strategist at Citigroup in New York.

"Ultimately what's come back to haunt the euro is the fact that the institutional framework in the euro area is not conducive to a quick response to combat the crisis," he added.

European banks have been hit hard by the fallout from a crisis that began in the United States when the housing market collapsed and bad mortgage debts multiplied.

More European governments offered bank deposit guarantees as regulators from Washington to Seoul scrambled to contain the deepest global financial crisis in 80 years.

The moves in Europe were in stark contrast to the situation in the United States, where Congress finally passed the government's $700 billion bank rescue plan on Friday.

Analysts said the flexibility that the bailout provides the U.S. economy would help support the dollar.

But the sharp drop in stocks on Wall Street, which pushed the Dow Jones industrial average <.DJI> to close below 10,000 for the first time in four years, pressured the dollar against the yen. The Dow marked its lowest close since October 2004.

The dollar dropped to a 4-1/2-month low of 100.26 yen <JPY=>, its biggest one-day decline in 10 years, according to Reuters data. It was last trading at 101.99 yen, down 3.1 percent on the day.

"The central theme here is complete and total risk liquidation from all assets and this is benefiting the yen tremendously," said GFT Forex's Schlossberg.

"The yen was cheap and used to finance every speculative investment you could find. Now the chickens are coming home to roost, all those speculative investments are being unwound. The yen rally has nothing to do with fundamentals in Japan."

Among casualties, the Australian dollar <AUDJPY=R> plunged to a four-year low against the yen and a four-year trough of US$0.6999 <AUD=> against the U.S. dollar amid expectations of an aggressive Australian interest rate cut on Tuesday.

The New Zealand dollar tumbled as low as 53.79 yen <NZDJPY=>, a six-year low, and dived to a session trough of US$0.5278 <NZD=>, the lowest since January 2003. (Additional reporting by Wanfeng Zhou; Editing by James Dalgleish)

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