The yen strengthened on Monday, as investors' appetite for risk was dented by worries of more trouble in the global financial sector and consequent falls in equity markets.

Rising risk aversion helped the dollar gain some ground versus the euro and a basket of major currencies, as investors repatriated money from riskier positions.

Goldman Sachs said it expects Citigroup to announce further writedowns next year and cut its recommendation on the stock to a sell.

But analysts said dollar sentiment remained bearish on expectations of a Federal Reserve rate cut next month, talk of Gulf states possibly abandoning their dollar pegs and discussions among oil producers about the potential for pricing crude against a currency basket rather than in dollars.

Worries about the health of the U.S. economy were fuelled by comments from Minneapolis Fed President Gary Stern, who said that he expected the U.S. housing market to weaken further.

It appears to be risk aversion that's dominating the markets, partly on the back of the comments from GCC that they will discuss their dollar peg next month, and partly the comments from Fed governor Stern overnight, said Niels From, currency strategist at Dresdner Kleinwort in Frankfurt.

Normally in a risk averse environment the dollar tends to strengthen a bit. But I believe this safe haven status has diminished and we are not seeing the dollar benefit as much.

By 6:22 a.m. EST the dollar was down 0.6 percent against the yen at 110.29 yen, inching back towards an 18-month low of 109.12 yen hit last week.

It was flat against the Swiss franc at 1.1179 francs, having earlier fallen to a 12-year low of 1.1155 francs.

A fall below 1.11 francs would herald a record low.

European equities fell 0.7 percent, hit by weakness in financial stocks. In currency markets, weakness in equities and a rise in risk aversion translates into a sell off in risky carry trade bets, where purchases of high-yielders are funded by cheap borrowing in the yen or Swissie.

The dollar index, a measure of its value against six major counterparts, was steady on the day at 75.864.

The euro was down 0.8 percent against the yen at 161.34 yen, and off 0.1 percent against the greenback at $1.4641 -- around a cent below this month's record peaks.

Broadly echoing recent comments from other euro zone policymakers, ECB Governing Council member Klaus Liebscher said on Monday that the strong euro is cushioning the euro zone from the impact of steep oil price rises, but excessive currency volatility is not welcome.


A light data calendar on Monday features the U.S. NAHB housing market index for September. Post-meeting comments made to reporters from G20 finance ministers and central bankers in Cape Town could also move markets.

G20 policymakers said over the weekend that too much volatility and erratic currency movements were unwelcome, and stressed the need to correct global economic imbalances in the face of rising risks to growth and inflation.

The market showed muted reaction to the communique because it was essentially a repeat of last month's G7 statement, particularly the emphasis that countries running current account surpluses -- namely China -- should allow their currencies to trade more freely.

Gulf countries, meanwhile, continue to debate the merits of maintaining their currency pegs to the dollar, with Saudi Arabia and the United Arab Emirates the latest to say they are considering tweaking their respective policies.

A weekend OPEC summit saw sharp political division over whether to take action against a weak dollar, for example by pricing oil against a basket of currencies.

All of this leaves the USD rather vulnerable to further falls over coming weeks, Calyon said in a research note, forecasting that the euro would reach $1.50 by year-end.

(Editing by Ron Askew)