Dollar, yen ease as Lehman hopes fuel risk appetite

By Jamie McGeever

LONDON (Reuters) - The dollar and yen weakened broadly on Friday as hope that troubled U.S. investment bank Lehman Brothers will be saved boosted equities and prompted currency dealers to cash in on the currencies' recent strong rallies.

Both the dollar and yen remain firmly on track for solid gains this week, fuelled by a general cutting of risk, unwinding of long-held leveraged positions and falling commodity prices.

The liquidation of many long-term currency bets over the last two months drove the dollar to a one-year high against a basket of currencies on Thursday, the euro to a year-low under $1.40, and the yen to a two-year high against the euro.

But the pullback on Friday comes as traders across all markets eye developments surrounding embattled U.S. investment bank Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz).

Sources say the U.S. Federal Reserve and Treasury are involved in talks with potential suitors for Lehman, which could come to a conclusion this weekend.

This speculation fuelled a late rally on Wall Street on Thursday. In early trade on Friday the major European stock markets were up more than 1 percent.

Once again, investors will take their cue from the banking sector, equity markets and general risk appetite instead of economic news. The economic calendar Friday includes the latest readings of U.S. retail sales, producer prices and University of Michigan consumer sentiment.

"Today's focus will definitely be what plays out in the banking sector. The dollar has completely detached from any U.S. economic fundamentals," said David Powell, currency strategist at Bank of America in London.

"The taking off of risk has been dollar-positive, and an increase in risk appetite has been dollar negative, which is what we're seeing today," Powell said.

At 0825 GMT the dollar index, a measure of the greenback's value against a basket of six major currencies, was down a third of percent on the day at 79.56 .DXY. It hit a one-year high of 80.375 on Thursday.

The euro was up 0.5 percent against the dollar at $1.4105, having tumbled to a year-low of $1.3879 on Thursday.

The euro was up three quarters of a percent on the day against the yen at 151.50 yen, bouncing back from a two-year trough of 147.47 yen on Thursday.

The dollar was up 0.3 percent at 107.50 yen.

WEAK US DATA?

Lehman's share price has been obliterated this week, and has lost some 90 percent of its value since late last year. The bank this week reported more losses and failed to lay out a clear plan on how it will raise much-needed capital, casting serious questions over its viability.

Coming only days after the U.S. government bailed out mortgage giants Fannie Mae FNM and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz), worries over the U.S. -- and global -- banking system continue to dominate currency market sentiment.

But rising fears over the U.S. banking system has sparked a wave of repatriation from U.S. investors to bring cash back home and limit their foreign currency exposure.

The yen has also benefited from investors' deleveraging and cutting risk.

On the economic front, U.S. data dominates on Friday. The latest employment and trade figures released over the last week, however, suggest the economy remains weak.

"With the greenback the favored safe haven currency and markets prone to reversal, we believe appetite for dollars is unlikely to wane in the short term," UBS currency strategists wrote in a note.

"However, data out of the U.S. has managed to cast some doubt over the U.S. current status as the favored economy in the current climate of global economic slowdown."

If the data are on the soft side, the euro could bounce further and notch up a weekly close above the 100-week moving average, which currently is $1.4128. This would represent a potentially key bullish technical development -- the euro hasn't had a weekly close below the 100-week moving average for two and a half years.