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NEW YORK, Jan 18 (Reuters) - The dollar gained against the
yen on Friday as rising equity markets calmed investors,
prompting a few to edge back into relatively risky carry
trades.
In carry trades, market players use low-yielding currencies
such as the yen to finance purchases of assets offering higher
returns. Those trades are more attractive when stock markets
rise, supporting investor risk appetite.
Investors also took small comfort from a financial package
U.S. President George W. Bush is expected to propose on Friday
which is aimed at cushioning the economy from a downturn.
U.S. Treasury Secretary Henry Paulson on Friday said that
there was an urgent need for a fiscal stimulus program to give
the slowing economy a boost but said it was not in danger of
stalling.
Stocks rose in Europe and futures pointed to a rebound on
Wall Street.
"There is recognition that equities are not in free fall,"
said Michael Woolfolk, senior currency strategist at Bank of
New York Mellon. "Concern on the U.S. dollar lifted."
Early in the New York session, the dollar rose 0.7 percent
to 107.49 yen <JPY=>. The euro was up 0.8 percent against the
yen at 157.75 yen <EURJPY=>.
Investors cautioned that the dollar's problems are not over
yet with the longer-term outlook for the U.S. economy remaining
bleak.
"I can't remember the last time the data has been this bad
and the continued problems in banks mean that in the
medium-term the U.S. economy will continue to struggle," said
Colin Asher, currency strategist at Nomura in London.
The euro <EUR=> was up 0.1 percent on the day at $1.4672
well off its all-time high just below $1.50 set in November as
expectations increased that the European Central Bank may cut
rates this year.
"The market is definitely nervous about any risk of the ECB
signalling that rates have peaked and that's keeping us in
relatively tight ranges," said Adam Cole, global head of
currency strategy at RBC Capital Markets.
BUSH PLAN
Helping lift some of the gloom surrounding the U.S.
economy, Bush's plan is to introduce tax rebates for families
and breaks for businesses that could cost up to $150 billion.
Federal Reserve Chairman Ben Bernanke, in testimony before
the House of Representatives' Budget Committee on Thursday,
also backed the idea that the struggling economy needed
rescue.
"There is still some feel good coming from yesterday's
speech from Bernanke," said Bank of New York Mellon's Woolfolk.
Bernanke reiterated a down assessment of the U.S. economy
that he gave last week, which investors saw as a signal that
the U.S. central bank was willing to cut the benchmark federal
funds rate aggressively from the current 4.25 percent this
month.
Interest rate futures have already fully priced in a
half-percentage point cut from the Fed at its regular policy
meeting on Jan. 29-30, and saw a 50-50 chance of an even
broader 75 basis point cut.
Markets also turned more bearish on the UK economy as weak
retail data figures prompted investors to price in a higher
probability of imminent rate cuts and to sell the pound
<GBP=>.
"More people are now starting to price in the possibility
of a 50 basis-point cut at the February MPC meeting," said
Asher at Nomura, adding that he did not think this was likely.
Sterling/dollar <GBP=> was down 0.5 percent at 1.9606.
(Reporting by Nick Olivari, additional reporting by Simon
Falush in London; Editing by Tom Hals)
