The yen gained broadly on Monday as investors cut exposure to risk amid expectations of widening financial sector losses tied to the U.S. subprime market.

The latest casualties outside the United States include four Norwegian municipalities hit by losses on U.S. investments and German state-backed regional lender WestLB, which will make a loss of up to 1 billion euros this year, thanks in part to the global credit market crisis.

In addition, some analysts have forecast that Royal Bank of Scotland will announce up to 1.9 billion pounds ($4.13 billion) of credit-related losses this week.

Traders also pointed to a report by Moody's Investors Service on Friday saying that it may be preparing a series of credit-rating cuts related to subprime that may impact over $100 billion worth of securities.

Between the Moody's report and news of more casualties in the financial markets, investors are simply going safe at the start of the week by buying yen, said Greg Salvaggio, a senior currency trader at Tempus Consulting in Washington.

Investors often borrow low-yielding yen to invest in higher-yielding, more risky securities and reverse those trades when risk aversion rises, bolstering the yen.

Salvaggio said the Japanese currency may rebound to 107 yen per dollar by the end of the year.

By early morning in New York, the dollar was down 0.7 percent at 110.33 yen having risen on Friday to 111.23, its highest since mid-November.

The euro was up 0.5 percent at 161.81 yen. The European currency rose 0.2 percent to $1.4665 still about three cents below November's record peaks but recovering some ground after posting its biggest weekly fall in percentage terms in more than three months.

The market is increasingly concerned... that the subprime and credit issues within the U.S. have now an increasing possibility to spill out into a global event and have a bigger impact on the global growth outlook, said Ian Stannard, senior foreign exchange strategist at BNP Paribas.

In this environment we would expect the low yielders to pick up some support, he added.


Last week, the dollar rose 1.5 percent against a basket of currencies - its biggest weekly gain since June 2006 - after the Federal Reserve cemented expectations for interest rate cuts next week and more next year. This boosted confidence that Fed easing would keep the U.S. economy from recession and ignited gains in stock markets.

Markets are fully priced for a 25 basis point cut in the Fed's benchmark rate to 4.25 percent on December 11 and are giving as much as a two-in-five chance of a bigger 50 basis points move.

Investors were reluctant to take big risks before euro zone and British interest rate decisions this week and a closely watched U.S. employment report that may help determine the extent of U.S. monetary policy easing next week and in the new year.

The European Central Bank is expected to hold its key rate at 4 percent on Thursday while retaining its overall hawkish tone in the face of target-busting inflation.

Minority expectations for a rate cut from the Bank of England this week were cooled by an unexpected rise in the November manufacturing PMI, boosting sterling.

Monday's calendar also features the U.S. Institute for Supply Management's manufacturing index at 10 a.m. which is expected to fall to 50.5 in November - teetering just above the 50 watermark between contraction and growth.

Investors are also eyeing any comments from countries in the Gulf Cooperation Council about the future of their pegs to the dollar as they start a two-day summit in Doha.

The GCC plans to ignore dollar weakness and currency reform in a statement after the summit, said an official who had seen an initial draft of the meeting's communique.

Keeping the pegs, given what is already priced in for these regional currencies, would likely trigger a knee-jerk dollar relief rally, though one we would see as temporary, JP Morgan said in a research note.

(Additional reporting by Tony Vorobyova in London; Editing by Andrea Ricci)