* Yen, dollar extend gains as weak PMIs knock share markets
* High-yielders sink on expectations of global rate cuts
* BoE, ECB, RBA, RBNZ all seen slashing borrowing costs
(Updates prices, adds comments, changes byline, dateline;
previous LONDON)
By Gertrude Chavez-Dreyfuss
NEW YORK, Dec 1 (Reuters) - The U.S. dollar and yen gained
on Monday as sharp declines in Chinese and European
manufacturing activity unnerved investors and pushed stock
markets worldwide lower.
The currencies have rallied over the last few months as
investors reversed risky trades funded by cheap yen and dollar
borrowings. Investors have also sought dollars as they pinned
their hopes on a substantial economic stimulus package from the
incoming Obama administration.
The yen performed best against currencies of countries
where central banks are expected to slash interest rates later
this week, including the euro, sterling and Australian dollar.
"This is a classic flight-to-safety reaction fueled by
further signs of a deteriorating global economy," said Omer
Esiner, senior market analyst, at Ruesch International in
Washington.
"Specifically, the dramatic slowdown in European, UK, and
Chinese manufacturing have pressured stock markets around the
world, including U.S. stock futures. These are all supportive
of safe-haven bids in the dollar and the unwinding of carry
trades, which has helped the yen," he added.
In early New York trading, the dollar was down 1.6 percent
against the yen at 94.00 yen <JPY=>. The euro also fell against
the yen, dropping 2.3 percent to 118.37 yen <EURJPY=>.
The euro fell 0.8 percent against the dollar to $1.2597
<EUR=>, while the ICE Futures' dollar index rose 0.5 percent to
87.147 <.DXY>.
Falls in the euro and other European currencies accelerated
after manufacturing activity in the euro area, which has
already entered recession, hit a record low in November.
[].
China also saw its manufacturing industry slump in November
as new orders, especially from abroad, tumbled []
The resulting risk aversion took global share prices, as
measured by MSCI's all-country index, down more than 1 percent
on the day [].
Sterling was off 2.9 percent against the greenback at
$1.4951 <GBP=>. Sterling's losses were exacerbated after
British figures showing manufacturing activity had shrunk at a
record pace.
DEFLATION THREAT
The Bank of England, the European Central Bank, the Reserve
Bank of Australia and the Reserve Bank of New Zealand are all
expected to cut rates by at least half a percentage point,
diminishing the yield advantage of their currencies over the
ultra-low yielding yen.
Analysts expect those four central banks to cut rates
aggressively to counter the threat of deflation and prevent the
global financial market crisis from further undermining the
economy.
"Evidence continues to build suggesting that these central
banks have further aggressive monetary easing to undertake in
order to stem the risks of a dramatic shift in price
expectations going forward," said Bank of Tokyo Mitsubishi in a
research note.
Yen crosses reflected those expectations, with sterling/yen
<GBPJPY=R>, Australian dollar/yen <AUDJPY=R> and New Zealand
dollar/yen <NZDJPY=R> all down more than 3 percent on the day.
Analysts expect the RBA to cut its benchmark cash rate by
75 basis points to 4.50 percent on Tuesday, while the RBNZ is
expected to slash a full 1.5 percentage points off its key rate
to 5 percent, which would match the magnitude of the Bank of
England's surprise cut last month.
Economists polled by Reuters expect the BoE to follow that
up with a more modest 50 basis point cut to 2.5 percent on
Thursday and the ECB is expected to cut by half a percentage
point on Thursday to 2.75 percent.
Investors will be keeping an eye on the November jobs
report on Friday. Later on Monday the Institute for Supply
Management releases its November manufacturing index.
(Additional reporting by Veronica Brown in London; Editing by
Tom Hals)
