FOREX-Dollar climbs, yen gains, risk aversion stays high

* Dollar broadly firmer; yen up on risk aversion

* Weaker stocks drive currency movements

* Month-end rebalancing flows underpin dollar

(Adds quotes and detail, updates prices)

By Naomi Tajitsu

LONDON, Oct 31 (Reuters) - The dollar rose against most major currencies on Friday as global share prices bumped lower on fears about a possible recession, keeping investors risk averse which also boosted the yen.

Stocks took little joy in an interest rate cut by the Bank of Japan, following similar moves by central banks including in the United States and China this week seeking to limit the economic damage inflicted by the credit crisis.

European shares stumbled one percent after Japan's Nikkei stocks average .N225 shed five percent on Friday as investors were unconvinced that a 20 basis point rate cut by the BOJ would do much to stop the economy slowing.

Recession fears and the credit crisis have driven down share prices. The Nikkei posted a 24 percent fall this month -- its biggest ever -- while European shares were also en route to their worst month on record.

Analysts said weak stocks were slamming high-yielding currencies as investors spurned the carry trade, where they borrow low-yielding currencies like the yen to pick up higher-yielding assets.

"Foreign exchange markets remain very jittery. Once again, the strongest performers in the last 24 hours have been the dollar, Swiss franc and most of all, the yen," said Tom Levinson, forex strategist at ING.

"So it's still very much a case of safe-haven, low-yielding currencies performing more strongly."

A sharp deterioration in the global economy is keeping expectations high that both the European Central Bank and the Bank of England will cut rates next week by 50 basis points. [ECB/INT] [BOE/INT]

Figures on Friday showing a fall in euro zone inflation boosted the argument for a rate cut by the ECB, which until recently had been wary of loosening policy because of global price pressures [ID:nBFA000757].

At 1128 GMT, the euro was down one percent at $1.2769, while it fell 1.9 percent against the yen to 124.95 yen. The dollar was down 0.8 percent at 97.81 yen.

Despite the dollar's losses against the yen, analysts said it would be supported, especially against the euro, by funds who need the U.S. currency for month-end window dressing purposes.

"Volatility is the watchword today," said Adam Cole, global head of currency strategy at RBS Capital Markets in London. "Large flows for hedging and rebalancing at the month end when the market is thin will likely prompt high volatility."

Other market participants said that the euro's sharp drop following a climb to around $1.33 on Thursday suggested that very few traders were comfortable taking outright short positions in the dollar.

Sterling was down around 1.3 percent against the dollar, but off session lows on news that UK banking giant Barclays PLC (BARC.L: Quote, Profile, Research, Stock Buzz) secured $12 billion in new capital [ID:nLV571355].

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