* Dollar falls as AIG rescue fails to calm markets
* Risk aversion sees yen reversing earlier losses
* Morgan Stanley, Goldman Sachs shares tumble (Recasts, updates prices)
By Lucia Mutikani
NEW YORK, Sept 17 (Reuters) - The yen rebounded on Wednesday as the U.S. government's rescue of insurer AIG and a jump in interbank borrowing costs failed to calm jittery markets, lifting the currency to near four month highs against the dollar.
American International Group's (AIG.N: Quote, Profile, Research, Stock Buzz) emergency $85 billion loan from the Federal Reserve did little to ease investor worries about the U.S. financial sector, with shares of Wall Street giants Morgan Stanley and Goldman Sachs tumbling.
"We are still seeing some very nervous markets despite the best efforts that the government has put forward," said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.
"It looks like there is significant stress in the market in terms of money market spreads still being wider and U.S. equity markets under pressure and during these much volatile periods, its seems to be the yen that's doing the best."
* Risk aversion sees yen reversing earlier losses
* Morgan Stanley, Goldman Sachs shares tumble (Recasts, updates prices)
By Lucia Mutikani
NEW YORK, Sept 17 (Reuters) - The yen rebounded on Wednesday as the U.S. government's rescue of insurer AIG and a jump in interbank borrowing costs failed to calm jittery markets, lifting the currency to near four month highs against the dollar.
American International Group's (AIG.N: Quote, Profile, Research, Stock Buzz) emergency $85 billion loan from the Federal Reserve did little to ease investor worries about the U.S. financial sector, with shares of Wall Street giants Morgan Stanley and Goldman Sachs tumbling.
"We are still seeing some very nervous markets despite the best efforts that the government has put forward," said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.
"It looks like there is significant stress in the market in terms of money market spreads still being wider and U.S. equity markets under pressure and during these much volatile periods, its seems to be the yen that's doing the best."
The dollar dropped as low as 104.39 yen at one point, not too far from nearly four-month troughs seen on Tuesday around 103.51 yen, according to Reuters data. It was last down 1.0 percent at 104.68 yen.
The sharp drop in stocks on Wall Street, which was led by financial shares, saw the euro surrendering earlier gains versus the Japanese yen. The European single currency was last down 0.3 percent at 148.00, after earlier climbing to 151.55 yen.
"Risk aversion remains very much in place. In fact, risk appetite has plummeted this morning with T-bill yields sharply lower as investors seek safety and liquidity," said Samarjit Shankar, global foreign exchange strategist at the Bank of New York Mellon in Boston.
"We are seeing continuing net buying of the yen as a result, while the Swiss franc also remains net bought."
INTERBANK RATES SPIKE
In a sign of continued distress in financial markets, the interbank cost of borrowing three-month dollars posted its biggest daily gain in almost nine years, while the cost of insuring 10-year U.S. Treasury debt against default rose on Wednesday to a record high.
A rise in crude oil prices and some unwinding of safe-haven positions hurt the dollar versus the euro, analysts said.
The euro last traded up 0.2 percent at $1.4148, but off session highs around $1.4269, according to Reuters data.
The ICE Futures U.S. dollar index, which measures the dollar's value against a basket of six currencies, slipped 0.2 percent to 78.974 .DXY.
"The dollar had benefited from safe-haven capital flows into U.S. Treasuries and we are seeing a little bit of an unwinding of that," said said Omer Esiner, a senior currency analyst at Ruesch International in Washington.
The dollar was mute to data showing that construction starts on new U.S. homes plunged to a 17-1/2-year low in August and the current account deficit widened in the second quarter.
The U.S. Federal Reserve elected to leave interest rates on hold on Tuesday at 2 percent, citing concerns about downside risks to growth and upside risks to inflation.
Elsewhere, Britain's economic backdrop continued to show deterioration with data released earlier showing that the numbers of jobless in Britain leapt by 32,500 in August, its biggest rise since December 1992.
The euro rose 0.2 percent to 79.00 pence, while sterling gained 0.3 percent to $1.7914.
Minutes of the Bank of England's latest policy meeting showed 8 of 9 policymakers voted to leave borrowing costs on hold at 5 percent, with one policymaker calling for a 50 basis point cut while a hike was also discussed.
The sharp drop in stocks on Wall Street, which was led by financial shares, saw the euro surrendering earlier gains versus the Japanese yen. The European single currency was last down 0.3 percent at 148.00, after earlier climbing to 151.55 yen.
"Risk aversion remains very much in place. In fact, risk appetite has plummeted this morning with T-bill yields sharply lower as investors seek safety and liquidity," said Samarjit Shankar, global foreign exchange strategist at the Bank of New York Mellon in Boston.
"We are seeing continuing net buying of the yen as a result, while the Swiss franc also remains net bought."
INTERBANK RATES SPIKE
In a sign of continued distress in financial markets, the interbank cost of borrowing three-month dollars posted its biggest daily gain in almost nine years, while the cost of insuring 10-year U.S. Treasury debt against default rose on Wednesday to a record high.
A rise in crude oil prices and some unwinding of safe-haven positions hurt the dollar versus the euro, analysts said.
The euro last traded up 0.2 percent at $1.4148, but off session highs around $1.4269, according to Reuters data.
The ICE Futures U.S. dollar index, which measures the dollar's value against a basket of six currencies, slipped 0.2 percent to 78.974 .DXY.
"The dollar had benefited from safe-haven capital flows into U.S. Treasuries and we are seeing a little bit of an unwinding of that," said said Omer Esiner, a senior currency analyst at Ruesch International in Washington.
The dollar was mute to data showing that construction starts on new U.S. homes plunged to a 17-1/2-year low in August and the current account deficit widened in the second quarter.
The U.S. Federal Reserve elected to leave interest rates on hold on Tuesday at 2 percent, citing concerns about downside risks to growth and upside risks to inflation.
Elsewhere, Britain's economic backdrop continued to show deterioration with data released earlier showing that the numbers of jobless in Britain leapt by 32,500 in August, its biggest rise since December 1992.
The euro rose 0.2 percent to 79.00 pence, while sterling gained 0.3 percent to $1.7914.
Minutes of the Bank of England's latest policy meeting showed 8 of 9 policymakers voted to leave borrowing costs on hold at 5 percent, with one policymaker calling for a 50 basis point cut while a hike was also discussed.
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