FOREX-Stocks sell-off keeps currencies in risk-averse mode

(Changes byline, updates prices, adds quotes)

By Toni Vorobyova

LONDON Jan 28 (Reuters) - The yen was firmer across the board on Monday as demand for risky trades eased with stocks once again on the back foot amid persistent worries that a slowing U.S. economy will hit corporate profits.

Currency investors have been using stocks as a guide for how much risk to take, favouring risky carry trades -- in which the low-yielding yen is used as a source of cheap funds to buy higher-yielding currencies -- whenever equities rally and reversing those trades when they fall.

European stocks fell around 2 percent after a drop of nearly 4 percent on Tokyo's bourse, and Wall Street futures also signalled a lower open.

"The feeling is of a moderate risk aversion, really currencies are taking their cues from the equity market," said Adam Cole, global head of FX currency strategy at RBC Capital Markets.

"The mood's certainly negative on the U.S. economy and U.S. equity market," he added, noting that this was also dollar-negative as long as it did not spark a rush of repatriations from U.S. investors as in previous recessions.

The dollar fell 0.25 percent against a basket of major currencies to 75.789 .DXY. The euro rose 0.3 percent to $1.4712 EUR=.

The dollar also eased to 106.41 yen JPY=, bringing its losses since the start of January to nearly 4.5 percent -- likely heading for its worst monthly performance in over 4 years.

FED FOCUS

Markets are betting that the Federal Reserve will cut interest rates by as much as 50 basis points after the two-day policy meeting ending on Wednesday, following last week's hefty 75-basis-point cut in a rare move between scheduled meetings.

"Assuming these expectations do not shift much, a 50 bps -- or larger -- Fed ease, especially if coupled with a still-dovish statement, should give at least a short-term lift to risk appetite, and in turn, carry trades," JP Morgan said in a research note.

All eyes will also be on a batch of data this week for clues on the U.S. economy's health, including December new home sales figures at 1500 GMT and the non-farm payrolls report on Friday.

Events later in the day feature results from corporate heavyweights including American Express and McDonald's, as well as speeches by a few ECB officials and President George W. Bush's State of the Union address.

Bush and congressional leaders have been trying to thrash out a $150 billion stimulus package to help to limit the economy's downturn this year from a reeling housing market.

In television interviews at the weekend, U.S. Treasury Secretary Henry Paulson said the Senate should quickly approve the stimulus proposal to boost the sagging economy. (Editing by Stephen Nisbet)