* Yen rallies, dollar index inches higher as stocks slide
* Aussie down as CPI dents expectations of bigger rate hike
* Norges Bank expected to raise rates
(Recasts, updates prices, adds quotes and comment)
By Jamie McGeever
LONDON, Oct 28 (Reuters) - The yen strengthened across the
board and the U.S. dollar inched higher on Wednesday as global
shares deepened their slide, prompting currency traders to trim
positions and reduce risk exposure.
A slide in European shares, led by declines in the banking
and energy sectors, accelerated the high-yielding Australian
dollar's sharp fall triggered by lower-than-expected domestic
inflation data, while boosting the low-yielding yen.
Australian consumer price inflation was generally in line
with forecasts but not strong enough to justify expectations for
an aggressive interest rate increase next week, which pushed the
Australian dollar to a two-week low. []
This followed surprisingly weak U.S. consumer confidence
figures on Tuesday.
Benchmark European shares fell 1.8 percent to a three-week
low <>, with banking shares significantly underperforming
to hit a near two-month low <.SX7P> as Irish banks slid sharply.
"Equity markets are going to struggle for a period. There
are certainly question marks to be posed about the ability to
maintain momentum when more central banks are gradually moving
toward exit strategy mode," said Derek Halpenny, senior currency
economist at BTM-UFJ in London.
"The data's not compelling any more in terms of confirming
strong recovery," he said.
Weaker shares prompted traders to buy the yen, which tends
to benefit when markets shun riskier trades.
By 1127 GMT, the dollar had fallen as much as around 1
percent on the day to 90.93 yen <JPY=>, retreating from a
one-month high of 92.33 yen hit on EBS the previous day.
The euro <EURJPY=R> fell 1.1 percent to a two-week low
around 134.35 yen, pulling back from a more than two-month high
of 138.49 yen hit on Monday.
The Australian and New Zealand dollars <AUDJPY=R> <NZDJPY=R>
each tumbled nearly 2.5 percent versus the Japanese currency.
"The market was badly caught short on cross/yen earlier in
the month and bought them all back," said a trader based in
London, referring to a sustained rally earlier this month in the
euro, and also the Australian and New Zealand dollars, which hit
their highest in a year against the yen last week.
"Those positions got overbought, so now we're heading back
towards levels in the middle of the rally."
The euro fell 0.3 percent to a two-week low of $1.4757
<EUR=>, retreating from a 14-month high of $1.5064 on Monday,
while the dollar index <.DXY>, a gauge of its performance
against six major currencies hit a two-week high of 76.386.
NORWAY TO RAISE RATES?
The Australian dollar was down 1.5 percent on the day at
$0.9030 <AUD=>, and overnight interest rate swaps markets showed
investors now looking for no more than a 25 basis point rate
rise at the Reserve bank of Australia's meeting next week.
"We've had an almost uninterrupted increase in the Aussie
dollar since the end of June, and an acceleration of that move
in October, so there's bound to be a lot of profit-taking," said
Johan Javeus, strategist at SEB in Stockholm.
Attention in Europe turns to Norway, with Norges Bank
expected to become the first European central bank to raise
interest rates since the global financial and economic crisis.
A 25 basis point rise to 1.5 percent is so widely
anticipated that traders sold the Norwegian crown against the
euro on Wednesday, cashing in on its sharp rise to a 14-month
high earlier this month.
"... the relevant question is whether or not the tone will
turn significantly more hawkish, suggesting an acceleration of
the tightening cycle. We don't think this will be the case,"
said Societe Generale strategists in a note to clients.
Data on Wednesday showed Norway's unemployment rate rose a
bit more than expected in August, pushing the euro to a
three-week high of 8.46 crowns <EURNOK=D4>. Earlier this month
it fell below 8.25 crowns for the first time since August 2008.
(Additional reporting by Naomi Tajitsu; Editing by Victoria
Main)
