By Vicki Schmelzer

NEW YORK, Nov 30 (MNI) - Risk appetite increased modestly Monday as financial markets attempted to recover from the turmoil created last week by Dubai World's decision to freeze its debt repayments.

Accordingly, U.S. stocks and commodity prices rose and the dollar again came under downward pressure, although failed to retest the same low levels seen overnight.

The Dubai World announcement, while largely ignored in U.S. action Wednesday, wreaked havoc in Asian markets Thursday morning, with spillover effects evident in most financial market instruments during the remainder of last week.

The ensuing risk aversion weighed on yen crosses and prompted the break of key "double bottom" support in dollar-yen at Y87.10, with an ensuing move to fourteen-year lows near Y84.82 Friday.

By Monday, most major currency pairs, with the exception of dollar-yen, had returned to the well-established ranges seen over the past few weeks.

Analysts continued to downplay possible contagion from the Dubai World announcement.

"While the violent market reaction reflects in part the general angst among investors and their particular concerns about sovereign risks, I am not convinced that this issue is big enough to rattle the world and keep asset prices depressed," said Stephen Jen, managing director of macroeconomics and currencies at Blue Gold Capital in a research note.

"Dubai's news will likely only have lasting negative effects only for Dubai, and no one else," he said, adding, "If anything, this episode may actually reduce the risk of sovereign defaults elsewhere."

Matt Strauss, senior currency strategist at RBC Capital Markets agreed that the final vote on the "Dubai effect" seemed to be that the market overreacted.

Nevertheless, the sell-off seen in many instruments in the wake of Dubai's announcement last week reflected several key considerations, he said.

"First, a large number of investors are more than ready to lock in profits at any sign of disruption after the strong risk appetite rally - this is especially true heading into year-end," Strauss said.

In addition, "a large number of write-downs and bad debts are not yet known in the market," he said.

Also, going forward, "quasi-government debt" will be eyed with more trepidation, with "implicit vs explicit government guarantees" an important distinction, Strauss said.

Finally, he reminded that "contagion of any financial eruptions remains pivotal to prevent mass panic and fear selling."

Liquidity remained especially tight Monday, due to month-end pressures and a willingness to hold on to profits, traders said.

Order boards were generally sparse, and unless there is additional profit-taking to come or larger global investors outflows heading into year-end, currencies may remain rangebound, they said.

Of the major currencies, dollar-yen remained the most perplexing.

Traders struggled to find a good reason for dollar-yen to be holding at 14-year lows and had a hard time buying yen on a Y86 "handle".

Their long-held views about Bank of Japan intervention have not been shaken despite reports that Japanese officials are considering measures to deal with a rising currency.

Traders did not see the BOJ intervening unilaterally to weaken the yen until dollar-yen trades well below Y85, perhaps even Y80.

"I think most people don't think they will be intervening at these levels," explained John McCarthy, director of foreign exchange at ING Capital Markets.

"I don't think things get dicey until we get below Y84," he said.

Even if Y85 gives way, some traders maintain the BOJ would probably wait to see if dollar-yen revisits the April 19, 1995 lows near Y79.70 before stepping in.

"I think they will wait until we are closer to Y80.00," said one U.S. trader.

"I think it would also help if they are not alone," he added.

Dollar-yen was trading at Y86.38 Monday, in the middle of a Y85.87 to Y97.03 range.

Euro-yen stood at Y129.64 and the euro at $1.5008, after holding respective ranges of Y128.98 to Y130.82 and $1.4965 to $1.5085.

The cross slipped to a seven-month low near Y126.90 and the euro fell to a one-week low of $1.4826 Friday.

George Davis, chief technical analyst at RBC Capital Markets noted two key dollar resistance levels in the euro and yen to keep an eye on in coming sessions.

For the euro, $1.4825 represents "key uptrend support dating back to March," he said.

A close below $1.4825 "would generate a bearish trend reversal that would highlight $1.4628, Davis said.

On the topside, larger euro resistance is seen at $1.5155 and $1.5287, he added.

In dollar-yen, the double-bottom lows from December 2008/January 2009 will now act as initial resistance, he said.

Additional resistance should be found at Y88.37 and Y89.00, with support for dollar-yen seen at Y85.42 and Y84.52, Davis said.

CFTC data released Monday, for positions as per November 24, showed that speculative accounts had a net yen long of +51,710 contracts, the largest net yen long in 2009 and the biggest net yen long position since April 29, 2008.

In other markets Monday, the S&P 500 closed up 0.38% at 1095.63, after trading in a 1086.34 to 1097.03 range.

NYMEX January light sweet crude oil futures settled up $1.23 at $77.28 per barrel after trading in a $75.13 to $78.00 range.

Looking ahead, the market awaits the Reserve Bank of Australia's decision Tuesday (25 basis point hike expected) as well as U.S. November ISM data.

In addition, two key Chinese November purchasing managers' surveys (CFLP +55.2 in October/HSBC +55.4 in October) are set for release.

Market News international's China business sentiment indicator was released last Friday, showing that headline sentiment fell to 61.11 in November from 64.56 in October.

The survey, conducted November 9-24 with 163 listed companies taking part, typically offers insight into the CFLP and HSBC surveys.

** Market News International New York Newsroom: 212-669-6430 **