By Eric Burroughs
TOKYO, Jan 30 (Reuters) - The dollar was steady against a
basket of currencies on Wednesday, with investors waiting to see
how big an interest rate cut the Federal Reserve delivers later
in the day in its fight against the threat of a U.S. recession.
But the U.S. currency, as well as high yielders like the
Australian dollar, fell against the yen as investors trimmed
positions before the Fed decision, which kicks off a slate of key
events including U.S. data on manufacturing and employment later
in the week.
A fall in Asian stocks also prompted market players to unwind
risky positions such as carry trades, in which the low-yielding
yen is used to finance purchases of higher-yielding assets
elsewhere.
Stock market moves have been a major driver for currencies,
as investors see them as a barometer for risk. Tokyo's Nikkei
share average <> was down 1.5 percent.
"Investor risk appetite is the factor that sets the yen's
direction now, more focused than the Japanese currency's yield
disadvantage over others," said a trader at a big Japanese bank.
The Fed is widely seen following up last week's emergency 75
basis point rate slash, its biggest in a quarter century, with
another cut of 25 or 50 basis points after a two-day meeting
ending later in the day.
A hefty Fed rate cut from the current 3.5 percent could cut
both ways for the dollar, which has slipped back towards record
lows hit last year against a basket of currencies.
While a bigger cut would erode the dollar's yield appeal for
investors, it could boost hopes that the economy can avoid a
sharper downturn this year and next and as a result give the U.S.
currency a lift.
"It's a tough call," said Sean McGoldrick, head of FX trading
at Morgan Stanley in Tokyo. "A 25 basis point rate cut could be a
happy medium between what the market is expecting and what would
be the prudent thing to do."
McGoldrick said the Fed would likely trim by 25 basis points
because it is still worried about inflation and does not want to
be seen as beholden to market expectations.
Futures on the fed funds rate were showing a roughly 70
percent chance of a half-point cut. <FEDWATCH>
After last week's aggressive cut, the Fed said it was acting
to counter a deteriorating economic outlook and increasing risks
to growth. The move also came after a sharp sell-off in stocks at
the start of the year on fears of a U.S. recession.
The dollar slid 0.3 percent to 106.75 yen <JPY=> from late
U.S. trade, but it stayed above a three-year low of 104.95 yen
struck last week.
The euro dipped to $1.4765 <EUR=> from $1.4770 <EUR=>, while
the single European currency was down 0.4 percent to 157.55
<EURJPY=R>.
The dollar index, a gauge of its performance against six
major currencies, barely budged at 75.54 <.DXY> compared with its
all-time low of 74.71 struck last November.
Data on Tuesday showing surprisingly strong U.S. durable
goods orders in December helped to ease some of the gloom about
the economy's health, even as other figures showed housing prices
in 10 metropolitan areas posted a record drop in November.
FED REACTION
The reaction of stock markets will also be key for the dollar
and the yen.
Gains on Wall Street following the Fed move would prompt
investors to buy higher-yielding currencies with funds from
low-yielding ones like the yen in the carry trade, pushing the
yen lower.
But any stock market slide would likely spark a pull-back in
major currencies against the yen, analysts said.
The Japanese currency has jumped against major currencies
mainly because of the shifts in investor risk appetite to hold
carry trades rather than any domestic factors.
The potential hit to the Japanese economy from a U.S.
slowdown and possibly recession has stirred speculation the Bank
of Japan could cut rates from the already low level of 0.5
percent -- the reason the yen is popular for carry trades.
(Additional reporting by Rika Otsuka; Editing by Mike Miller)
