* Dollar advances versus yen on AIG rescue news
* Yen under broad pressure on easing risk aversion
* Fed to give AIG $85 bln loan, take 80 pct stake
* CNBC: Morgan Stanley ponders staying independent
By Satomi Noguchi
TOKYO, Sept 17 (Reuters) - The dollar advanced against the
yen on Wednesday after the Federal Reserve rescued insurer
American International Group <AIG.N>, 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
the insurer from a "disorderly failure" that could damage the
global economy. []
The U.S. action eased worries about the stability of the U.S.
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 U.S. officials to rescue the
insurance company, despite some views that such action would
involve moral hazards," Amikura said.
After the collapse of Lehman Brothers <LEH.P>, which did not
get funding assistance from the U.S. government, investors had
feared AIG would suffer a similar fate and exacerbate the turmoil
in the 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 106.07 yen for a gain of 0.3
percent on the day.
The greenback trimmed some of its gains after CNBC reported
on its website that Morgan Stanley officials were weighing
whether the firm should retain its independence or merge with a
bank give the recent turbulence in its stock.
The euro rose 0.3 percent to 149.83 yen <EURJPY=> after
shooting up more than 1 percent above 151.50 yen at one stage.
The euro's sharp gain versus the yen contributed to its 0.1
percent rise against the U.S. dollar to $1.4147 <EUR=>.
AIG's rescue is the latest event in what has already been one
of the most tumultuous weeks in the history of finance. Merrill
Lynch <MER.N> agreed on Monday to be bought by Bank of America
<BAC.N> for $50 billion.
Yet the overall market remains fragile as the tightness in
U.S. dollar funding persisted in Asia trading on Wednesday,
underscoring that the uncertainty about the health of the
financial system remained strong, traders said. []
"The fact that banks are still distrustful of lending to each
other suggests that U.S. companies may be facing more
difficulties in getting funds from banks, hurting the broad
economy," said Hiroshi Yoshida, a trader at Shinkin Central Bank.
"That's a negative for the dollar," said Yoshida.
The Australian and New Zealand dollars were lifted as
regional stock markets steadied and major central banks around
the world stepped in to shore up confidence in banking system.
The New Zealand dollar gained 0.6 percent to 69.75 yen after
hitting 71.09 yen <NZDJPY=R>, rebounding from a four-year low
around 67 yen touched the previous day.
(Additional reporting by Shinichi Saoshiro and Wayne Cole in
Sydney; Editing by Hugh Lawson)
