* Dollar broadly firmer; yen up on risk aversion
* Gloomy U.S. data further fans recession fears
* Month-end rebalancing flows underpin dollar
(Updates prices, adds quotes)
By Gertrude Chavez-Dreyfuss
NEW YORK, Oct 31 (Reuters) - The U.S. dollar and yen posted
sharp gains on Friday as investors turned more cautious after
bleak U.S. economic reports heightened global recession fears.
The dollar, which was on track for its biggest monthly gain
against a basket of currencies in more than 17 years, was also
boosted by month-end demand from global fund managers seeking
to rebalance foreign exchange hedges in their portfolios.
"The market expected poor October data, but the scale of it
has reminded the market that even though we are at a phase
where the liquidity risk is being priced out, the economic
outlook is not particularly appealing," said Sebastien Galy, a
currency strategist at BNP Paribas in New York.
"So it's the usual theme we're seeing today -- whenever the
data is poor, we see the dollar strengthening relative to the
euro and commodity currencies. We are still in a very elevated
level of risk aversion."
Financial markets took little comfort from 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.
Investors were unconvinced a 20 basis point rate cut by the
BoJ would do much to avoid a slowdown in the Japanese economy.
In midday New York trading, the euro was down 1.6 percent
against the dollar at $1.2698 <EUR=>. It was down about 9.6
percent in October, the euro's worst monthly performance since
its launch in 1999.
The ICE Futures' dollar index, a gauge of the greenback's
value against a basket of six major currencies, rose 1.4
percent to 85.995 <.DXY>. The index rose 8.0 percent in
October, its best monthly gain since March 1991.
The euro fell 1.4 percent against the yen to 125.44 yen
<EURJPY=>, while the dollar <JPY=> rose 0.2 percent to 98.810,
reversing earlier losses.
RECESSION WORRIES
Data showing a steep drop in business activity in the U.S.
Midwest and a record decline in consumer confidence this month
reinforced worries about a recession around the world, which
bolstered the dollar even though the reports came out of the
United States.
"The Chicago PMI (Institute for Supply Management-Chicago)
hints at deeper than normal recession," said Dustin Reid,
senior FX strategist at RBS Global Banking and Markets in
Chicago.
"The concern here is that as firms' margins get squeezed
even more, so do profits, and equities could continue to grind
lower. Although not great for the domestic economic outlook, if
recent historical patterns persist, it should work towards the
benefit of the dollar," he added.
The yen, meanwhile, strengthened despite the BoJ rate cut,
as risk aversion, which tends to favor the yen, took hold.
The Japanese currency was up 6.5 percent versus the dollar
on the month en route to clock its biggest gain in more than 8
years. It struck a 13-year peak against the dollar and a
6-1/2-year peak against the euro this month, jumping roughly 15
percent on a trade-weighted basis. <.IBOXXFXJPY>.
Other big currency moves included sterling's fall versus
the dollar this month -- 9.2 percent so far -- potentially its
largest monthly decline in 16 years.
Traders on Friday will also be focused on the daily flows
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 substantial declines in
asset values throughout October," said Goldman Sachs in a
research note.
"This kind of flow should typically favor lower-yielding
currencies relative to higher-yielding ones. However, given
that 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 Andrea Ricci)
