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* Citi merger talk, equity rebound prompt FX turnaround
* "Risk" currencies like sterling, Aussie and NZ dlrs rise
* General economic, financial distress likely to limit move
* Dlr up at 95.20 yen <JPY=>, euro up to $1.2530 <EUR=>
By Jamie McGeever
LONDON, Nov 21 (Reuters) - The yen fell back sharply from
earlier highs and the dollar weakened broadly on Friday as a
rebound in global stocks from the previous day's rout curbed
investors' demand for the Japanese and U.S. currencies.
Talk that beleaguered U.S. bank Citigroup <C.N> could
explore a merger deal, Japanese officials warning that the
recent equity market slide is destabilising and speculation
China may cut interest rates helped lift risk appetite.
Tokyo's Nikkei share average erased earlier losses and
climbed 2.7 percent <> on expectations of a strong Wall
Street recovery after the S&P 500 index slumped on Thursday to
its lowest point since 1997. []
Traders were also wary of adding to bets on the yen after
Japanese Finance Minister Shoichi Nakagawa said authorities must
be ready to deal with big market swings. []
The improvement in equity market sentiment followed a day of
extreme volatility which had driven investors to the relative
safety of government debt and in currencies, the yen.
On Thursday Citi lost a quarter of its value, fears over the
U.S. auto industry deepened, U.S. three-month T-bill yields fell
to virtually zero, U.S. equity volatility closed at a record
high and U.S. weekly jobless claims soared.
The Swiss National Bank stunned markets with a surprise
interest rate cut of 100 basis points.
Fears over the global financial crisis and deepening
recession in many economies were highlighted on Friday, however,
by surprisingly weak euro zone purchasing managers data.
"The (FX) turnaround is clearly in risk aversion," said
Colin Asher, currency economist at Nomura, pointing to stocks.
"Conditions also looked highly oversold ... and that may be
the tone for the day," he said, although he didn't rule out
another bout of yen strength if risk aversion bubbles over
again: "a reversal of the reversal".
At 0910 GMT the dollar was up 1.3 percent on the day against
the yen at 95.20 yen <JPY=>, recovering from a three-week low of
93.55 yen struck the previous day.
The euro rose 1.8 percent to 119.25, also bouncing back from
a three-week low of 116.45 yen hit on Thursday.
The euro climbed 0.6 percent against the dollar to $1.2530.
The Australian and New Zealand dollars were both up more
than 2 percent against the greenback at $0.6230 <AUD=> and
$0.5317 <NZD=>, respectively, while sterling was up 0.8 percent
at $1.4840 <GBP=>.
PMI PLUNGE
There was little reaction to the Bank of Japan's decision to
keep rates on hold at 0.30 percent. [] but the Swiss
franc continued to fall in the wake of the SNB's rate cut on
Thursday.
The economic fragility that prompted the SNB's aggressive
move was also highlighted on Friday by a report that showed euro
zone manufacturing and service sectors contracting much more
quickly and deeply than expected in November.
The flash purchasing managers' indices tumbled to record
lows and also showed that inflationary pressures in the
15-nation currency bloc were fading fast. [].
The weaker-than-expected PMI survey "likely will feed the
recession fears gripping markets and pose more downside for risk
assets," JP Morgan currency strategists said in a note.
For the rest of the session Friday traders will look to
equity markets, Citigroup -- whose share price fell below $5 --
and U.S. Congressional efforts to rescue the auto industry for
direction.
Major European bourses were up more than 1 percent in early
trade on Friday, and U.S. stock futures pointed to strong gains
at the open.
