Yen cuts fear-induced gains in volatile trade; G7 eyed

By Veronica Brown

LONDON (Reuters) - The Japanese yen retreated from three-year highs against the euro but remained elevated in highly volatile trade on Friday, as unnerved investors unloaded risk on deep worries about the global financial system.

Stock markets in Europe were down sharply -- but off earlier lows -- keeping the Japanese unit as the currency of choice.

In overnight Asian trade, Japan's Nikkei share average .N225 plunged nearly 12 percent at one stage and was down 23 percent for the week -- about twice what it suffered in the week of the 1987 crash -- after U.S. stocks slid sharply on huge selling of bank and insurance shares.

Tokyo stocks were also hit by the bankruptcy filing of insurer Yamato Life, the first Japanese financial institution to fall victim to the credit crisis.

Coordinated interest rate cuts by the Federal Reserve and major central banks this week failed to relieve investor fears that the freeze in credit markets will cause more damage to banks and a sharp economic recession around the world.

"Essentially we're flying blind. No-one has a clue what's going on," DZ Bank currency strategist Sonja Marten said.

"The uncertainty is too great and volatility is incredible. It's a question of market confidence and somehow we're going to have to get it back," she added.

Leaders from Group of Seven powers are meeting in Washington to mull other joint measures to try and stop the panic in markets.

The euro slid to a three-year low of 132.80 yen before substantially cutting losses to 134.89 yen, down 0.2 percent on the day, according to Reuters data.

The dollar hit a 6-1/2 month low of 97.92 yen before clawing back to 98.96 yen, down 0.4 percent on the day.

The Australian dollar, the most battered of major currencies due to its once favored status in the carry trade, was down almost 4 percent at 65.18 yen.

As investors continued scrambling for cash, the dollar hit a 14-month peak .DXY against a basket of major currencies before retreating to trade flat on the day. The euro was up 0.1 percent to $1.3620.

G7 SOLUTION?

The world's economic powers are facing huge pressure to contain the financial crisis on growing fears of a global economic recession.

In a bid to unfreeze bank lending and staunch massive losses in equity markets, the U.S. government is weighing guaranteeing billions of dollars in bank debt and temporarily insuring all U.S. bank deposits, The Wall Street Journal reported.

"Markets would appear to require reassurance that global policymakers are prepared to be global leaders," RBC strategists said in a note to clients.

British Prime Minister Gordon Brown called for a global solution to the crisis and urged other countries to adopt Britain's actions to save the banking system.

Other governments should follow Britain in putting money into struggling banks and offering guarantees worth hundreds of billions to persuade banks to start lending to each other, Brown wrote in an article in The Times newspaper.

(Reporting by Veronica Brown; Editing by Chris Pizzey)