* Dlr near 4-mth low vs yen <JPY=>, gains on high-yielders
* Risk aversion dominates in wake of Lehman collapse
* Potential Fed rate cut eyed later as o/n dlr rates soar
* Stock markets under pressure
(Updates prices, adds quotes, changes byline)
By Ian Chua
LONDON, Sept 16 (Reuters) - The dollar steadied near 4-month
lows versus the yen on Tuesday, but held gains against high
yielders as investors took refuge in safe-haven assets following
the collapse of Lehman Brothers <LEH.N>.
Worries that the fallout from Lehman would claim other
victims underpinned flight-to-safety flows, sending government
bonds higher and stocks lower and making banks reluctant to lend
to one another.
Analysts said that, despite much of the bad news originating
in the U.S., the dollar was benefitting from the spreading
financial jitters as investors became increasingly keen to
convert to cash for safety.
(For stories on Lehman Brothers, see []).
"The negative news coming from the U.S., which is resulting
in global asset market volatility, is actually proving to be a
bit of a supportive factor for the dollar given that it's
triggering repatriation flows back into U.S. dollars," said Ian
Stannard, senior foreign exchange strategist at BNP Paribas.
"So from that perspective, the dollar will remain well
supported. But there is still further downside potential for
dollar/yen; position unwinding is going to provide the yen
support over the medium term."
Trading was extremely choppy ahead of the outcome of the
Federal Reserve's policy meeting at 1815 GMT, made worse by
illiquidity in money markets as the interbank cost of borrowing
overnight dollar funds soared to above 10 percent.
The high rates have a direct impact, particularly on
speculative plays, as they makes it expensive to take positions
in the spot currency markets.
"The driving force here is still risk reduction," said Simon
Derrick, head of currency research at Bank of New York Mellon.
"In the grand scheme of things, the two great funding
currencies of the past six or seven years have been the dollar
and the yen and so it's no surprise to me it should be those two
currencies that continue to benefit."
At 1049 GMT, the dollar was 0.4 percent lower at 104.07 yen
<JPY=>, having earlier slipped to its lowest since May at 103.62
yen, while the euro fell 1.05 percent to 147.69 yen <EURJPY=>.
On Monday, the yen posted its biggest daily percentage gain
versus the dollar since 1998.
Yen crosses were also hit, with the Australian dollar
sinking to its lowest since June 2005 <AUDJPY=> at 81.45 yen,
while the New Zealand dollar hit its lowest since late 2003
<NZDJPY=>.
The euro slipped 0.5 percent to $1.4187 <EUR=>, well off the
session peak of about $1.4479 struck on Monday.
Risk-averse investors also sent the Aussie and Kiwi down 2
and 1.1 percent respectively against the U.S. dollar <AUD=>
<NZD=>.
Fears about the banking sector overshadowed economic data,
which took a backseat for a second session. Figures earlier
showed German investor sentiment improved by more than expected
in September, albeit off a low base, while euro zone inflation
slowed in August from July peaks.
EYES ON FED
Futures markets are pricing in a 94 percent chance of a 25
basis point cut from the current 2 percent Fed funds rate when
the central bank gives its verdict, but speculation is building
on the possibility of a bigger 50 basis point cut.
"(The) financial market turmoil suggests the Fed will cut
rates today. Our U.S. economics team expects Fed funds will be
reduced by 50 basis points to 1.50 percent," said UBS in a note.
With troubles also abounding at insurance giant AIG <AIG.N>,
the VIX equity market volatility, or 'fear', index soared to
31.87 percent on Monday, its highest in 6 months.
Market sources said dollar lending between banks had
virtually ceased, and traders and analysts said central banks
needed to provide more liquidity.
"European banks can't get dollars. Banks are hoarding (cash)
in case of payment issues," related to the collapse of Lehman
Brothers, one market source said.
"We need the ECB and SNB to start providing more dollars,"
he added.
The European Central Bank pumped 70 billion euros into money
markets while the Bank of England offered 20 billion sterling in
an exceptional fine-tuning operation.
(Reporting by Ian Chua and Veronica Brown; editing by John
Stonestreet)
