FOREX-Dollar up vs euro on ECB view; risk aversion lifts yen

Dollar hit a one-month peak against the euro on Monday as investors braced for the European Central Bank to cut interest rates this week and Standard & Poor's announced a ratings warning for Spain.

The yen was stronger, hitting a three-week high against the dollar and a one-month peak against the euro as fear of a worsening global slump led investors to shun risk in favor of the low-risk and low-yield returns of yen-denominated assets.

Investor risk appetite, already dulled by declines in world equity markets, took another dive after S&P's outlook revision on Spain, which boosted worries about the euro zone outlook.

The news from S&P "is making people a bit nervous in terms of the sovereign risk in Europe," said Ken Landon, global foreign exchange strategist at JPMorgan Chase in New York. "Euro/dollar came off quite sharply after that, while the yen is benefiting as the usual safe-haven currency."

In late New York trading, the euro edged down 0.4 percent at 1.3380 after sliding to a session low of $1.3289 earlier. It also fell 1.6 percent to 119.23 yen , after hitting a low of 118.65 yen.

The dollar fell 1.3 percent to 89.10 yen , just above a three-week low and near December's 13-1/2-year trough just above 87 yen.

Global stock markets fell, with the U.S. benchmark S&P 500 .SPX on Monday capping its worst two-day stretch in a month.

"The yen is influenced by the external environment and the risk trade," said Win Thin, senior currency strategist at Brown Brothers Harriman in New York. "It's mostly safe-haven flows."

The high-yield Australian dollar fell 3.3 percent to $0.6797 and 4.5 percent to 60.64 yen , weighed down by risk aversion and lower commodity prices. Sterling was sharply lower, dropping 2.3 percent against the dollar to $1.4824.

WAITING FOR THE ECB

Markets expect the European Central Bank to cut key interest rates by 50 basis points to 2 percent on Thursday, according to a recent Reuters poll. Interest rate futures on Monday showed investors see a 75 basis point cut, though some were bracing for a full percentage point move. ECBWATCH

Data last week showed factory output collapsing across Europe, raising the prospect for a large rate cut by the ECB.

Dominique Strauss-Kahn, managing director of the International Monetary Fund, also said in a media interview on Monday that Europe was "behind the curve" on taking economic stimulus measures and he expected interest rates to decrease further in Europe. For details, see [ID:nLC240454]

"The fear among many observers is that by delaying the inevitable, the ECB may exacerbate the economic slowdown in the region, creating a disastrous contraction in demand," said Boris Schlossberg, director of currency research at GFT Forex in New York.