* Yen firms broadly on banking woes
* Yen hovers near 13-½ yr peak vs dlr, 7-yr high vs euro
* Sterling dips again after rebounding on G7 comment
* BOJ leaves interest rates at 0.10 pct as expected
By Satomi Noguchi
TOKYO, Jan 22 (Reuters) - The yen held near a 13-1/2-year peak hit against the dollar and a seven-year high struck versus the euro the previous day, buoyed by growing investor anxiety about global banking woes.
Sterling hovered above a 23-year low hit against the dollar on Wednesday, erasing gains made after a source told Reuters the currency’s slide would be discussed at the next meeting of the Group of Seven industrialised countries in February. [ID:nLL70613]
The pound has come under severe pressure this week as a government rescue package for struggling British banks failed to reassure investors or stem losses in banking stocks. At one point on Wednesday, sterling plunged to $1.3620, its lowest since 1985.
U.S. bank shares erased some of their losses made earlier in the week and fuelled a Wall Street rally on Wednesday, helping Asian stocks cling to small gains. [MKTS/GLOB]
Tokyo's Nikkei stock average .N225 gained 1.9 percent on Thursday. [.T]
But that did little to soothe worries about global financial sector fragility and investors continued to shift funds into the perceived safety of the yen and the dollar.
“Sterling still looks far from hitting a bottom with mounting expectations for further and bigger interest rate cuts from the Bank of England to combat the quickly deteriorating economy,” said a senior trader at a Japanese trust bank.
Traders said forecasts for further shrinking interest rate gaps between Japan and European countries gave the yen additional strength against sterling and the euro.
The BOJ kept rates at 0.10 percent as widely expected after ending a two-day policy meeting on Thursday.
Though it stood pat on rates, the central bank said it would buy corporate bonds maturing within a year and start purchasing commercial paper to ease corporate financing and warned the country faced two years of deflation. [ID:nT42338]
The dollar was down 0.3 percent at 89.15 yen JPY=. It had rebounded from Wednesday's low of 87.10 yen, the lowest since July 1995.
The euro dropped 0.7 percent to 115.89 yen EURJPY=R, falling back towards the seven-year trough of 112.08 yen. Against the dollar, the euro fell 0.4 percent to $1.2994 EUR=.
Market focus was on whether Japanese authorities would act to prevent the yen from appreciating further.
Japan’s top currency bureaucrat, Naoyuki Shinohara, said he was carefully monitoring foreign exchange markets after the yen’s advance to multiple-year highs. But Shinohara refrained from elaborating on the chance of Japan intervening in the market to stem the yen’s surge, saying “no comment on intervention”. [ID:nTKG003256]
Japanese Finance Minister Shoichi Nakagawa tried to talk down the soaring yen by flagging the risk of intervention but declined to speculate on whether Tokyo was ready to act. [ID:nSP288020]
“A consensus has formed in recent years among G7 countries to support a flexible exchange rate regime, and that currency policy is an international matter unlike monetary policy which is left to individual countries,” said Tohru Sasaki, chief forex strategist at JPMorgan in Tokyo.
“That would make it difficult for Japan to intervene on its own,” he said.
Traders said comments from U.S. Treasury Secretary-designate Timothy Geithner also suggested the likelihood of Japanese intervention had diminished somewhat, giving the yen a lift.
Geithner said major U.S. trading partners should operate flexible exchange rate regimes, adding that President Barack Obama would press China to let market forces play a larger role in setting the value of its currency. [ID:nN21486527]
“Japanese authorities are likely to refrain from intervening near term, but they could decide to step in if the dollar threatens to fall below 85 yen and leave the domestic equity market in turmoil,” said Tomoko Fujii, head of economics and strategy at Bank of America in Tokyo.
The pound declined 0.7 percent to $1.3888 GBP=D4 after slipping to as low as $1.3840 earlier in the day.
Sterling rebounded sharply in late overseas trade on Wednesday when France’s economy minister, Christine Lagarde, said the Bank of England should take more steps to support sterling. [ID:nLL742265]
Sterling’s decline had gathered steam earlier on Wednesday after shares of Barclays Plc (BARC.L) tumbled by as much as a third in value to a 24-year low in London on fear that it needs to raise funds or may be nationalised. [ID:nLL283101]
Sterling dropped 0.9 percent to 123.87 yen GBPJPY=R but held above a record low of 119.36 yen touched the previous day.
Additional reporting by Shinichi Saoshiro; Editing by Brent Kininmont