* Dollar broadly firmer; yen up on risk aversion
* Weaker stocks drive currency movements
* Month-end rebalancing flows underpin dollar
(Updates prices, adds quotes, byline)
By Gertrude Chavez-Dreyfuss
NEW YORK, Oct 31 (Reuters) - The U.S. dollar and yen
gained ground on Friday, as investors turned more cautious and
after equity share prices worldwide resumed their decline amid
fears about a possible recession.
The dollar, which was on track for its biggest monthly gain
versus the euro since the single currency's launch in 1999, was
also being boosted by month-end demand from global fund
managers seeking to rebalance foreign exchange hedges in their
portfolios.
Financial markets took little comfort in the Bank of
Japan's interest rate cut, the latest monetary policy
initiative after central banks in the United States, China, and
other countries lowered rates this week to stem the negative
impact of the credit crisis on their respective economies.
European shares <> stumbled after Japan's Nikkei
stocks average <> shed 5 percent on Friday as investors
were unconvinced a 20 basis point rate cut by the BOJ would do
much to avoid a slowdown in the economy.
"Risk aversion has once again returned to the market and
that's why we're seeing the dollar and yen benefit again," said
Matthew Strauss, senior currency strategist at RBC Capital
Markets in Toronto.
"There is also a lot of profit-taking going on after sharp
gains over the last few days in equities including
high-yielding currencies," he added.
In early New York trading, the euro was down 1.2 percent at
$1.2751 <EUR=>, while it fell 1.8 percent against the yen to
124.95 yen <EURJPY=>. The dollar <JPY=> was down 0.7 percent at
97.97 yen.
The dollar showed little reaction to data showing a slight
easing in U.S. prices pressures and a decline in consumer
spending, which dropped for the first time in two years. For
the story, click on [].
Investors were also disappointed by the BoJ's less than
expected rate cut as equities fell. Earlier, the speculation
was that the Japanese central bank would cut interest rates by
25 basis points.
The yen, meanwhile, strengthened despite the rate cut, with
investors focused on Friday's blood bath in global equity
prices. The Japanese currency was up 7.7 percent versus the
dollar on the month so far, en route to clock its biggest gain
in 10 years.
Traders on Friday will also be focused on the daily fixings
in the currency market, which could reflect significant
month-end buying of the U.S. dollar.
"It appears possible that substantial FX hedge adjustments
have to be made by asset managers after a substantial declines
in asset values throughout October," said Goldman Sachs in a
research note.
"This kind of flow should typically favour lower-yielding
currencies relative to higher-yielding ones. However, given the
mechanics are relatively clear, speculative accounts may have
positioned for this already and therefore major crosses may
display some volatile bounces throughout the day."
(Editing by Kenneth Barry)
