* Dollar hits 4-mth low vs yen on stocks sell-off
* Yen gains broadly as safe haven in credit turmoil
* Dollar trims losses as Asian stocks recover from lows
By Rika Otsuka
TOKYO, Sept 30 (Reuters) - The dollar fell to a four-month
low against the yen on Tuesday as investors fled risky positions
after U.S. lawmakers refused to pass a $700 billion bank bailout
plan, sparking the biggest Wall Street stock sell-off since 1987.
But the dollar quickly recovered ground against the yen, as
Asian stock markets trimmed some of their earlier losses.
The U.S. House of Representatives on Monday unexpectedly
rejected a plan to buy toxic assets from struggling banks in an
effort to revitalise strained lending markets. []
The move hit the dollar by dashing hopes for a comprehensive
solution to the credit crisis that has claimed a variety of major
financial institutions such as Lehman Brothers this month,
stirring worries of a deeper economic downturn.
"There are many dollar-selling factors such as a slowing
economy, possible Fed rate cuts and an outlook for worsening
fiscal conditions for the U.S. government as it is expected to
spend money to rescue banks," said Osamu Takashima, chief
currency analyst at Bank of Tokyo-Mitsubishi UFJ.
But the euro and sterling have also suffered as banks in
Europe succumb to the widening crisis fallout, prompting
investors to rush for currencies seen as a safe-haven during the
turmoil, such as the yen and Swiss franc.
"The simple way to understand all the developments is that
the yen is an alternative choice as a safe haven, with the euro
and dollar shunned due to the credit crisis," said a senior
trader at a Japanese trust bank.
The rejection by U.S. lawmakers of the bailout package caused
panic among investors, with the Dow Jones industrial average
<> suffering its biggest one-day point drop ever. Asian
markets tumbled as well, with Japan's Nikkei average <>
falling nearly 5 percent at one stage.
The Nikkei later recouped some losses and was down 3.7
percent in late trade.
The dollar struck a four-month low of 103.50 yen on trading
platform EBS before recovering to 104.45 <JPY=>, up 0.4 percent.
Despite the dollar's recovery, traders expect it to weaken
against the yen as risk aversion is expected to spread after
trade moves to Europe and the United States.
The dollar is also vulnerable because more investors are
betting the Federal Reserve will cut interest rates from the
current 2.0 percent in an effort to limit the economic fallout
from the worst financial crisis since the Great Depression.
The dollar fell 4.3 percent against the yen during September,
when problems in the U.S. financial sector went from bad to
worse.
Earlier this month, the U.S. government took control of
troubled mortgage finance giants Fannie Mae <FNM.N> and Freddie
Mac <FRE.N> and bailed out insurer AIG <AIG.N>, while Lehman
Brothers <LEHMG.PK> filed for bankruptcy.
The euro fell 0.2 percent to $1.4391 <EUR=>, after falling to
a low of $1.4338 earlier on Tuesday. The single currency was 2.2
percent below where it was at the end of August.
The euro was up 0.1 percent at 150.24 yen <EURJPY=R>, off an
earlier low of 148.84 yen. It hit a two-year low earlier in the
month.
On Monday, the credit crunch claimed new victims -- Wachovia
Corp <WB.N> as well as many European banks -- showing the
financial crisis is spreading from the United States to Europe.
Banks in Britain, Belgium, Russia, Iceland and the United
States were rescued by authorities over the weekend, prompting
mammoth injections of cash into the global banking system by
central banks to relieve frozen money markets.
But interbank rates stayed painfully high, showing the
efforts of global central banks have not succeeded in easing
credit tightness.
"Funds are not reaching financial firms that need money as a
sense of panic continues to dominate markets," said a trader at a
big Japanese bank. "It is reaching a point where financial
markets, including the forex market, are not functioning."
(Additional reporting by Chikako Mogi; Editing by Michael
Watson)
