Yen rallies again on weakening yuan, swooning stocks

By Richard Leong

NEW YORK (Reuters) - Investors unnerved by the global market rout due to fears about a weakening yuan and the Chinese economy piled into the yen on Thursday, sending it to the strongest levels against the dollar in over four months.

The uncertainty on China led traders to sell the Australian dollar, which is seen as a proxy for Chinese growth, pushing it to its lowest since September versus the greenback and the yen .

"The yen seems to be the only place to go to," said Ellis Phifer, senior market strategist at Raymond James in Memphis, Tennessee.

A fresh safe-haven dash into the yen was spurred by a further weakening of the Chinese currency, a move that is seen as an attempt to stimulate the world's second biggest economy.

As fears about Chinese growth persist, Wall Street shares tumbled for a second day with the Standard & Poor's 500 index losing over 2 percent. This forced investors who had borrowed euros to fund their stock positions to buy euros back so they can exit those positions. [.N]

Consequently, the euro booked its best day against the dollar and yen in over a month. It gained 1.4 percent at $1.0927 . It recovered from a near nine-month low against the yen and was last up 0.6 percent at 128.45 yen .

The euro rose earlier in the wake of minutes from the Federal Reserve's December meeting on Wednesday which showed some policymakers were worried inflation may stay at dangerously low levels.

In a bid to help the country's exporters, the People's Bank of China set its official yuan midpoint rate 0.5 percent weaker than Wednesday. That was the biggest daily decline since last August, when Beijing abruptly devalued the yuan by almost 2 percent.

"The lower yuan fixing probably signifies greater risks to the Chinese economy than we know of, leading to risk-off trades," said Jeremy Stretch, head of currency strategy at CIBC World Markets in London.

Global stock markets were rattled by the Chinese market <.CSI300>, which plunged 7 percent at one point, leading to a nation-wide trading halt for the second time this week.

The yen briefly retreated from its initial highs after China suspended its stock market circuit breaker mechanism, which is seen as a move to shore up investor confidence.

The yen was last up 0.8 percent at 117.56 yen per dollar and up 1.7 percent against the Aussie at 82.37 yen.

The dollar index was down nearly 1 percent in late trading for its biggest one-day loss in nearly a month.

(Additional reporting by Anirban Nag in London; Hideyuki Sano in Tokyo; Editing by Larry King, Chris Reese and Chizu Nomiyama)