FOREX-Yen slips as risk appetite perks up; dlr flat

(Changes byline, adds comments and quotes)

By Jamie McGeever

LONDON Feb 4 (Reuters) - The yen weakened broadly on Monday as a rally in global equity markets signalled a tentative recovery in risk appetite, while the dollar steadied against a basket of major currencies.

After being whipsawed last week on a batch of U.S. developments -- including another hefty interest rate cut, weak growth and jobs figures and a surprisingly perky manufacturing report -- the dollar took a breather on Monday.

The rebound in global equity markets, meanwhile, encouraged investors to sell low-yielding units like the yen for relatively higher-yielding currencies like the Australian dollar and euro.

After the flood of news from the United States last week, investors will turn their attention this week to central bank policy meetings in Europe and Australia.

The Reserve Bank of Australia is expected to raise interest rates later this week, while the European Central Bank is expected to keep rates on hold. The Bank of England will likely lower borrowing costs, although sterling strengthened broadly on Tuesday in a snap back from heavy selling on Friday.

"Stocks are performing okay and despite the very soft NFP (U.S. jobs report last week) there is still some risk appetite in the market, and that is benefiting the carry trade," said Niels From, currency strategist at Dresdner Kleinwort in Frankfurt.

"The key events this week will be the rates decisions in Europe. The market is looking at the rhetoric from the ECB ... and a rate cut from the Bank of England. Will the ECB take a step back from its very hawkish stance or not?"

At 1200 GMT, the dollar was up 0.3 percent on the day against the yen at 106.95 yen JPY= and the euro was up 0.4 percent against the Japanese currency to 158.45 yen EURJPY=R.

The euro EUR= edged up 0.1 percent to $1.4817, coming back down from a two-month high of $1.4956 on Friday and a record peak of $1.4966 struck in November.

The dollar index, a measure of the greenback's value against a basket of six major currencies, was unchanged at 75.45 .DXY.

BAD U.S. NEWS PRICED IN?

Stock market moves have been a big driver for currencies, as investors see equity market performance as a barometer of risk. Rising stock markets tend to benefit higher-yielding currencies at the expense of lower-yielding ones.

Japan's Nikkei share average .N225 settled 2.7 percent higher, while the FTSEurofirst 300 .FTEU3 index of top European shares was up almost 1 percent at midsession.

U.S. stock futures point to a slightly higher open on Wall Street.

The dollar was hit by two hefty interest rate cuts from the Federal Reserve last month, along with fears of a U.S. recession and the potential for more U.S. financial firms to suffer credit losses from problems at bond insurers.

Data last week showed that the economy expanded at a mere 0.6 percent in the fourth quarter, and that jobs were shed in December for the first time in over four years.

But some investors argue that the grim news on the United States has now been factored in -- Fed funds futures expect at least another 75 basis points of Fed rate cuts this year to fight off recession.

The focus, therefore, is switching to other economies, the prospect of economic spillover and the implications for rates relative to the dollar going forward.

"In our view, it is very likely that U.S. interest rates will surprise to the upside relative to both ECB and BoE rates over the coming months - either through more easing by the European central banks than is priced in or, if U.S. prospects brighten, through higher U.S. interest rates than currently expected," wrote Barclays Capital strategists in a note to clients on Monday.

(Editing by Stephen Nisbet)