FOREX-Prospect of US tax cuts boosts FX risk appetite

(Changes dateline, byline, updates prices, adds quotes)

By Toni Vorobyova

LONDON, Jan 9 (Reuters) - The dollar steadied versus the euro and rose against the yen on Wednesday as investors took a report of possible growth-boosting U.S. tax cuts as a prompt to curb bets against the U.S. currency.

Risk appetite in currency markets improved after the Wall Street Journal reported the Bush administration was considering a tax break plan for households and businesses [ID:nT247580].

The Australian dollar benefited most as investors re-entered carry trades, which involve selling low-yielding currencies like the yen to invest in higher-yielding ones.

Strong Australian retail sales, which increased expectations of a rate rise as early as February, and a rise in gold to a record high <XAU=>, also boosted the Aussie, helping it gain 1 percent versus the yen <AUDJPY=R>.

"Having gained sharply in recent sessions the yen is prone to a bit of a correction in terms of a bit of profit taking," said Mitul Kotecha, head of global FX research at Calyon.

"Given the market's perception that a (U.S.) recession is looking increasingly inevitable, tax cuts and any stimulus measures offered by the authorities will obviously bode well (for risk appetite) ... It's more positive for the dollar because there is a sense that it may help avoid a recession."

By 0824 GMT, the dollar was up half a percent at 109.49 yen <JPY=>, pulling away from a six-week low of 107.86 yen hit according to Reuters data on Friday.