* Dollar falls to two-week lows vs euro
* Central banks move to ease money market tensions
* Yen falls, high-yielders rise
(Updates prices, adds comment, byline)
By Gertrude Chavez-Dreyfuss
NEW YORK, Sept 18 (Reuters) - The dollar dipped to a
two-week low against the euro on Thursday, while the yen also
fell as central bank efforts to ease a global credit crisis
prompted investors to buy back more risky assets and diminished
the greenback's safe-haven appeal.
Still, analysts warned that financial markets remain shaky
even with action from global monetary authorities as pressures
on U.S. banks persist.
Investors had sought refuge in the dollar in the past month
amid turmoil in the financial sector. U.S. investors bailed out
of overseas markets and sent money back home while foreign
investors clung to the safety of U.S. Treasuries.
Yen buying, meanwhile, was fueled by the unwinding of carry
trades that took advantage of the Japanese currency's low
interest rates to purchase higher-yielding assets.
"We had the central bank action, which sent a wave of
improved risk sentiment and that weighed on the dollar," said
Richard Franulovich, senior currency strategist at Westpac
Banking Corp.
Heightened jitters about the banking sector this week after
the collapse of Lehman Brothers and the bailout of troubled
insurer AIG <AIG.N> exacerbated tension in financial markets,
with banks reluctant to lend to one another. This prompted the
Federal Reserve and other top central banks on Thursday to
offer to pump billions of dollars into global money markets to
ease funding pressure. For the story, click on [].
The euro <EUR=> jumped to $1.4541, the highest since Sept.
4. By midday, it was trading at $1.4371, still up half a
percent on the day.
The dollar index on the ICE Futures Exchange <.DXY>, which
tracks the greenback's performance against six major
currencies, was down 0.3 percent at 77.985, having hit a
roughly three-week low at 77.260.
MAJOR RETRACEMENT IN THE DOLLAR SEEN
Westpac's Franulovich said he expects a major retracement
in the dollar after it posted steep gains in the past two
months. "I think the dollar is a badly damaged currency and is
in big trouble. It is beginning to come off, especially with
the way gold traded sharply yesterday," he said.
The dollar was up 0.5 percent against the yen at 104.82 yen
<JPY=> while the euro rose 0.8 percent to 150.66 yen<EURJPY=>.
High-yielding currencies such as the Australian and New
Zealand dollars also benefited, gaining against the U.S. unit.
The Aussie dollar climbed 1.3 percent to US$0.7962 <AUD=>.
The central bank action helped ease deadlock at the short
end of interbank lending markets, with the London interbank
offered rate (Libor) for overnight U.S. dollars sliding sharply
to 3.84375 percent on Thursday from 5.03125 percent on
Wednesday. That is still almost 2 full percentage points above
the Fed's 2 percent target rate, however.
U.S. stocks, meanwhile, were modestly higher by midday.
"For the time being, this all has stabilized the financial
system," said Andy Busch, global foreign exchange strategist at
BMO Capital Markets in Chicago.
"It will continue to push out from the financial system
into the mainstream economy as job and credit losses manifest
in higher borrowing costs and lower demand for goods and
services. How far it reaches is too soon to say."
Investors were also monitoring developments at Morgan
Stanley <MS.N>, whose shares took a beating on Wednesday and
were trading lower again on Thursday, as investors wondered
whether it and rival Goldman Sachs <GS.N> could continue as
independent entities.
Morgan Stanley was in deal talks with U.S. regional banking
powerhouse Wachovia Corp. <WB.N> and negotiations have advanced
to a more formal stage, according to a source.
Earlier, data showing a drop in continuing jobless claims
and a surprise jump in the Philadelphia Federal Reserve Bank
index of business activity boosted the dollar, although the
impact was brief.
(Editing by Dan Grebler)
