FOREX-Yen drops on better risk appetite, awaits U.S. news

* Dollar and yen ease ahead of U.S. GDP and Fed's decision

* Yen drops across the board in light trading

* Aussie, kiwi regain ground as risk aversion ebbs

By Anirban Nag

SYDNEY, April 29 (Reuters) - The U.S. dollar and the yen were on the defensive on Wednesday as risk aversion eased slightly, lifting high-yielding currencies, though many were cautious ahead of U.S GDP data and a Federal Reserve meeting.

Trading was light in Asia with Tokyo shut for a local holiday. Selling in the yen JPY=, however, picked up with the euro rebounding from six-week lows against the Japanese currency EURJPY= and the Aussie AUDJPY= recovering strongly from a one-month low.

Investors unwound some of the risk aversion seen in recent days, partly helped by better U.S. economic data which held tentative hopes the economy may be stabilising.

U.S. consumer confidence posted its biggest jump in over three years in April, while the slump in home prices showed signs of slowing in February. [ID:nN28304426]

The euro rose to 127.45 yen, from a 6-week low of 124.36 yen, while the Aussie jumped to as high as 69.04 yen from a one-month low. The U.S. dollar also climbed 0.5 percent to 96.91 yen JPY=, from 96.39 yen late in New York on Tuesday.

"Yen crosses are being squared off at the moment after traders went short," said Sue Trinh, senior currency strategist at RBC Capital Markets. "The main focus will be on the Fed and whether there are any signs from them supporting the "green shoots" theory."

The Federal Reserve ends a two-day meeting on Wednesday and while rates are already near zero, analysts will be looking for any extension of quantitative easing and for its assessments for any early signs of a recovery in the world's largest economy.

Patrick Bennett, a forex and rate strategist at Societe Generale, suspects the Federal Open Markets Committee (FOMC) will not entirely buy into the "green shoots" theory.

"There is a temptation to building on green shoots, but we suspect the FOMC will be cautious on the growth outlook and this could be a disappointment for investors," said Bennett.

U.S. GROWTH DATA

First-quarter U.S. gross domestic product (GDP) will also be reported late in the day. Median forecast is for a contraction of 4.9 percent annualised, but estimates range as deep as an 8.0 percent drop ECONUS.

"Business investment and inventories will subtract drastically from growth, but if our view of a 2.8 percent contraction is correct, risk will certainly get another boost," said Alan Ruskin, chief international strategist at RBS Global Banking and Markets.

Risk appetite had taken a beating on Tuesday after the Wall Street Journal reported that regulators have told Citigroup Inc (C.N) and Bank of America (BAC.N) that they may need to raise more capital based on early results of the government's stress tests on banks. [ID:nBNG118035\].

In addition, the worries about swine flu in Mexico peristed, tempering demand for riskier assets. Double-click on nFLU for more stories.

Meanwhile, the euro was also supported by comments from a senior European Central Bank official, Lorenzo Bini Smaghi, who doused expectations for quantitative easing. His comments stood at odds with talk the ECB may announce quantitative easing at its policy meeting on May 7.

Speculation the ECB may use exotic monetary policy to fight a recession has hurt the euro in recent weeks. The euro EUR=, however extended gains on Wednesday, inching up to $1.3152 from $1.3140 late in New York and a low around $1.2962.

(Reporting by Anirban Nag; Editing by Wayne Cole)