January 9, 2008 / 8:47 AM / 12 years ago

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.

Traders said the dollar was also supported against the yen by corporate demand and buying from Japanese institutional investors.

The euro was 0.6 percent higher at 161.07 yen EURJPY=. It was steady versus the dollar at $1.4713 EUR=.

CENTRAL BANKS CENTRE STAGE

The dollar has been held back by worries of a slowdown in the U.S. economy and market expectations for further monetary easing by the Federal Reserve.

Markets are pricing in as much as a 70 percent chance that the Fed will slash interest rates by a hefty half-point at its late-January meeting to 3.75 percent. A cut of at least a quarter-point is seen as virtually certain.

With no first-tier data due on Wednesday, the focus will be on a speech by St Louis Fed president William Poole at 1430 GMT.

Thursday features a speech by Fed Chairman Ben Bernanke as well as interest rate decisions by the European Central Bank and the Bank of England.

The ECB is seen leaving rates on hold at 4 percent and sticking to its hawkish tone, while for the BoE economists polled by Reuters see a median 35 percent chance of a rate cut to 5.25 percent from 5.50. (Editing by Mike Peacock)

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