NEW YORK -- The yen surged on Wednesday as signs the U.S. credit sector woes are starting to hurt European banks prompted investors to reduce their exposure to risky trades financed in the Japanese currency.

France's largest bank, BNP Paribas, said three of its funds were hit by problems in the U.S. subprime mortgage sector and had temporarily suspended redemptions.

Fears that problems in U.S. subprime mortgage market are rippling beyond U.S. shores prompted investors to cut risky investments. Credits concerns also sent U.S. and euro zone overnight borrowing rates soaring as banks scrambled for cash.

The yen rallied sharply and high-yielding currencies such as the Australian and New Zealand dollars, popular targets of carry trades financed in the Japanese currency, tumbled by more than 1 percent. The dollar climbed across the board.

"This is definitely a credit squeeze and people are hoarding dollars," said Russel LaScala, head of currency trading for Deutsche Bank in New York. "They are putting the anti-risk trade on which means sell euro/yen, sell kiwi/yen, and sell all the high yielders."

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Reflecting the massive rush out of yen-funded carry trades, the Canadian dollar, New Zealand dollar, and Australian dollar all plunged more than 2 percent against the Japanese currency.

The lone exception for the dollar gains was against the Japanese currency. It was down 1 percent on the day at 118.40 yen, while the euro slid 2 percent to 161.87 yen , on track for its biggest daily decline in more than two years.

The single European currency slipped 0.9 percent to $1.3670 , almost two cents below July's record high of just above $1.3850.

Reflecting a big rush into cash, European overnight borrowing rates spiked to their highest level since October 2001, prompting that European Central Bank to inject around 95 billion euros into the system in a quick overnight tender.

U.S. overnight rates spiked around half a percentage point to 5.86 percent, the highest since early 2001.

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