* Dollar drops vs euro and yen in volatile trade
* Worries over banks intensify as MS, Goldman shares tumble
By Satomi Noguchi
TOKYO, Sept 18 (Reuters) - The dollar fell against the euro
and yen in volatile trade on Thursday as losses in U.S.
investment banking stocks and doubts over the bailout of insurer
American International Group <AIG.N> fuelled financial sector
fears.
Shares of Morgan Stanley <MS.N> and larger rival Goldman
Sachs <GS.N> plunged on Wednesday, stoking talk that Wall Steet's
two surviving big investment banks may have to join up with a
commercial bank to survive the intensifying credit contraction.
Morgan Stanley has held preliminary takeover talks with
Wachovia Corp <WB.N>, a person familiar with the situation told
Reuters. []
Separately, CNBC reported that Morgan Stanley was in talks
with China's CITIC while HSBC was also cited as a possible suitor
for the No.2 U.S. investment bank [].
But a senior CITIC Securities executive said on Thursday the
firm was not holding any talks on a possible investment in Morgan
Stanley. []
Takeover reports also swirled over weakened top U.S. saving
bank Washington Mutual, major British mortgage lender HBOS and
others. []
"The dollar's weakness stems from being at the centre of the
global financial crisis, but that crisis is also forcing
investors to repatriate dollars, presenting a mixed picture to
the market," said Kengo Suzuki, a currency strategist at Shinko
Securities.
Traders said flows related to the liquidation of previous
trades was dominating currency moves, making price action very
volatile and tough to forecast.
The euro rose 0.4 percent from late New York trade to $1.4382
<EUR=>.
The euro was up 0.3 percent at 150.40 yen <EURJPY=R> after
choppy trade that briefly pushed it as high as 150.96 yen on EBS.
The short spike in the euro helped other currencies such as
the Australian and New Zealand dollars gain against the dollar
and the yen, but the effect was fleeting.
The dollar was down 0.1 percent at 104.55 yen <JPY> after
swinging between an early low of 104.13 yen and the day's high of
104.94 yen. The U.S. currency had hit a four-month low of 103.54
yen on Tuesday.
Trade was extremely light, exaggerating market moves, as
investors retreated to the sidelines due to fear of further
trouble in the banking sector, traders said.
"Investors are much too pessimistic about the U.S. financial
sector," said Tsutomu Soma, senior manager of foreign assets at
Okasan Securities.
"Because of that, any positive news such as a merger
agreements between banks or new steps to help stabilise financial
markets from the Fed could easily boost the dollar," Soma said.
Market players said growing worries about the dollar may have
been more clearly reflected in a jump in gold prices, helping the
euro to rise against the dollar even as credit and economic
concerns weighed on the single currency.
Gold briefly extended gains in Asia, rising more than 3
percent after posting a record one-day gain in absolute dollar
terms the previous day with investors fleeing to safety as they
watched global equities prices plunge.
But Shuichi Kanehira, a senior trader at Mizuho Corporate
Bank, said it may be almost meaningless to read the dollar's
moves in relation to movements in other asset prices because
other markets were also affected by mixed position liquidation.
"A big rise in gold prices may not necessarily suggest a
long-lasting trend, just as the dollar's direction is hard to
read right now with the market nervous."
Indeed, gold later gave up its gains and turned negative in
Asian trade. []
(Additional reporting by Rika Otsuka; editing by Sophie Hardach)
