* Yen gains broadly as stocks retreat from earlier gains
* Markets remain volatile on bank woes, recession fears
* High-yielding currencies slide as risk appetite stays low
(Re-leads, adds comment, updates throughout)
By Naomi Tajitsu
LONDON, Oct 17 (Reuters) - The yen rose on Friday as stocks
gave up much of their early gains, highlighting an ongoing slump
in risk demand due to fears of a global recession, which is seen
as inevitable as nations try to salvage their banking systems.
Investors were wary that bank bailouts by governments around
the world would come at a high cost to an already slowing global
economy. As a result, an ongoing reversal in risky trades
boosted the low-yielding Japanese currency, pushing it higher in
volatile trade.
"We're still in an incredibly unstable market which will
persist for a long time. Although we've had all these policy
initiatives, it won't necessarily stop the extreme moves we've
seen across the markets," said Bilal Hafeez, foreign exchange
strategist at Deutsche Bank in London.
"Given that context, I expect to see the yen strengthen
across the board."
A raft of weak U.S. economic data on Thursday showing a
slump in manufacturing has highlighted the prospect of a
recession, which analysts say will continue to keep shares on
the back foot.
The dollar <JPY=> fell 1 percent to a session low of 100.61
yen after European shares briefly wiped out most of their gains
after rallying around 4 percent in early trade. At 1045 GMT,
shares <> were up 1.6 percent.
The Japanese currency has been boosted since the credit
crisis escalated last month as many in the market consider it to
be low-risk as its key interest rate of 0.5 percent remains much
lower than that of other currencies.
The euro <EURJPY=> fell 1.7 percent to 135.14 yen, inching
closer to a three-year low around 132 yen hit last week, while
high-yielding currencies like the Australian dollar <AUDJPY=>
and the New Zealand dollar <NZDJPY=> both fell roughly 2
percent.
The pull-back in European shares slapped the single European
currency <EUR=>, which fell 0.6 percent to $1.3398.
Despite its losses against the yen, the dollar <.DXY> rose
0.4 percent against a basket of currencies to 82.600.
LENDING THAW
Market participants said that a gradual thaw in frozen
interbank lending was suggesting that government plans to rescue
banks around the world could help salvage the banking system,
which may bring some stability to markets in the near- to
mid-term.
The cost of borrowing overnight dollars have tumbled this
week, while three-month rates have also inched lower as bank
recapitalisation plans by governments as well as a flooding of
markets with cheap funds have helped to loosen liquidity.
"The fixings on Libor rates continue to edge down, bringing
the prospect of some rejuvenated interbank lending that little
bit closer, even if it is still some way distant," analysts at
Calyon said in a research note on Friday.
They added that investors are hopeful of tangible progress
of plans by the governments of the UK, the United States,
France, Germany and a host of other countries to recapitalise
their banks using taxpayer funds.
Yet markets are impatient for tangible signs of bank
stability as a recession looms, and Calyon added that more U.S.
economic data was likely to keep sentiment gloomy on Friday.
Figures on U.S. housing starts are due later in the day, as
is a reading of consumer sentiment, and weak readings would
bolster the argument that the U.S. economy is sinking into a
recession -- if it hasn't already.
