Yen breaks 3-day rise as risk-aversion eases

TOKYO, June 28 (Reuters) The yen broke a three-day rally on Thursday as a rebound in U.S. stocks the previous session eased concerns about fallout from U.S. subprime mortgage sector problems, prompting investors to sell yen again in carry trades.

A weaker-than-expected reading in Japanese industrial output data for May also pressured the yen.

Traders added that many Japanese investment trusts investing in foreign assets are scheduled to go on sale at the end of the month, giving investors another reason to sell yen.

''Worries about financial problems appear to have subsided for now, and hedge funds are selling the yen back,'' said a senior trader at a Japanese bank.

The dollar rose 0.40 percent to 123.30 yen rebounding from a two-week low of 122.23 yen hit in the previous session.

The Japanese currency had been picking up from a 4-1/2-year low against the dollar this week on unwinding of carry trades sparked by worries that the U.S. subprime loan problems could start to hurt the broader economy. In carry trades, investors borrow in a low-yielding currency such as the yen to buy higher-yielding currencies and assets.

The euro was up 0.40 percent at 165.95 yen rising back towards an all-time high of 166.94 yen hit last week.

The single European currency was little changed from late New York trade at $1.3455 U.S. stocks rallied on Wednesday, ending a three-day slide, and the Nikkei share average was up 0.40 percent at the start of trade on Thursday.

Japan's industrial production fell 0.4 percent in May from a month earlier, much lower than market expectations of a 0.8 percent rise.

EUTERS RC VP0605