By Eric Burroughs
TOKYO, Jan 29 (Reuters) - The dollar was steady against major
currencies on Tuesday, with market players bracing for a Federal
Reserve meeting and a heavy week of U.S. data that will give more
clarity on whether the economy is on the verge of recession.
Traders said financial markets remain volatile and can shift
on a dime as investors try to sort out how badly the U.S. economy
is faring and whether expectations for aggressive Fed rate cuts
will lead to renewed selling of the dollar.
The yen edged up, partly on Japanese investors repatriating
funds, even as the Nikkei share average <> rallied 3 percent
following a surge in U.S. shares on chances of an aggressive Fed
rate cut on Wednesday following a two-day meeting.
Shares and currencies have fluctuated wildly since the start
of the year, with the Fed's emergency rate cut last week helping
stem a frantic sell-off in stocks that has since been blamed
partly on French bank Societe Generale unwinding positions
amassed by a rogue trader.
"The markets are still looking for a proper trend for the
year and working through a lot of conflicting signals," said Rick
Lloyd, head of G10 currency trading at ABN AMRO in Singapore.
"People are struggling for direction at the moment."
Markets showed little reaction to President George W. Bush's
final State of the Union address in which sought to ease concerns
about the U.S. economy and urged Congress to pass a $150 billion
stimulus package. []
Investors see the Fed to slashing rates by half a percentage
point for its second aggressive cut in as many weeks.
Some traders doubted whether the move would spur a
significant rally in U.S. equities and, in turn, other major
stock markets.
Worries about the knock-on impact on the global economy from
a potential U.S. recession have curbed risky positions like carry
trades, in which the low-yielding yen is used to fund holdings of
higher-yielding assets and currencies.
"We're still not out of the woods yet when it comes to risk
aversion," said Hideki Amikura, a forex manager at Nomura Trust
and Banking.
Stock market moves remain a big driver for currencies, as
investors use them as a barometer of risk. Climbing stocks
typically spur carry trades and send higher-yielding currencies
up against the yen.
The dollar dipped 0.2 percent from late U.S. trade to 106.62
yen <JPY=>, pulling away from the day's high of 107.14 yen. Last
week the U.S. currency hit a nearly three-year low of 104.95 yen.
The euro fell 0.3 percent to 157.46 yen <EURJPY=R> and has
suffered big swings against the Japanese currency while clawing
back from a five-month low of 152.10 yen touched last week.
Some traders said Japanese investors were repatriating funds
from maturing European government bonds, dragging the single
currency lower.
The euro edged down 0.1 percent to $1.4767 <EUR=>, a touch
lower on the day after matching a two-week high near $1.4800.
A 50 basis points cut in the federal funds rate to 3.0
percent on Wednesday would follow the 75 basis point cut last
week for an usually aggressive 125 basis points in a little more
than a week, highlighting the Fed's worries about the outlook.
Reports on U.S. jobs and manufacturing due later this week
will give the latest picture on the health of the economy, with
any more signs of weakness expected to sting the dollar, stocks
and carry trades.
"We have to wait for the jobs report to see how close the
U.S. is to a recession," said Hiroshi Yoshida, a forex trader at
Shinkin Central bank.
Data on Tuesday showing a jump in Japanese consumer spending
and a steady unemployment rate in December had a minimal impact
on currencies, doing little to change market expectations that
the Bank of Japan's next move could be a rate cut from 0.5
percent.
(Additional reporting by Naomi Tajitsu)
