FOREX-Dlr up on slightly better risk demand, Fed view

(Changes byline, adds quotes, updates prices)

By Veronica Brown

LONDON May 12 (Reuters) - The dollar rose a full percent against the yen on Monday and approached a two-month high versus a basket of currencies, boosted by a slight rise in risk demand and growing speculation that U.S. interest cuts may be ending.

Weak economic data suggesting that Australia and New Zealand may be heading for rate cuts initially pushed down the high yielding currencies of both countries, as lower borrowing costs would trim their rate advantage against other currencies.

Stock markets and sterling were cheered as results from European banking heavyweight HSBC (HSBA.L) came in stronger than expected [nL12579110].

Market liquidity was thin however, with many European markets closed for holidays, and analysts said that this had sharpened currency moves.

News that a major earthquake had shaken parts of China had limited initial impact on the currency market as investors awaited more news of damage. Click on [nSP239734]

The dollar has rallied in recent weeks on speculation that the Federal Reserve may be nearing the end of its rate-cutting cycle, having slashed them by a total of 3.25 percentage points since September to 2 percent.

Analysts said that while risk appetite had picked up with stock markets rising, many investors stayed cautious about the health of the global economy and financial systems.

"I think sentiment is slowly moving in terms of a slowdown in the U.S. spreading to the rest of the world. Maybe some participants are thinking that they have priced in a bit too much weakness in the U.S.," Citigroup currency strategist David Pais said.

"Our own sense is that the slowdown in the U.S. is going to be a lot worse because it's very much the epicentre of the financial market problems and the housing market problems," he added.

The euro was down 0.2 percent on the day at $1.5449 EUR= having earlier dipped below the $1.54 mark to hover within range of a two-month low of $1.5284 hit last week.

Against a basket of currencies, the dollar was up 0.1 percent to 73.219 .DXY, pushing towards 73.895 touched last week for the first time since early March. Sterling bucked the dollar's trend to rise 0.3 percent on the day to $1.9586.

The dollar rose more than 1 percent to near a session high of 103.95 yen JPY=, with much of the gain having been nade before news of China's earthquake.

Market participants offered limited initial reaction to an announcement by the People's Bank of China that it raised its reserve requirement ratio by 0.5 percentage point, to take effect on May 20. Click on [nBJB000090]

FED PAUSE EYED

After the dollar's tumble in the wake of aggressive Federal Reserve interest rate cuts and efforts to pump cash into gummed-up money markets, the Fed is now seen on hold and expectations are mounting for other central banks to cut rates.

Analysts said that a series of speeches by Fed officials due this week would be scrutinised for more clues into whether the end for aggressive rate cuts was near.

"If they come out hawkish it could be a sign that Fed cuts are down for the short term ... and this would support the dollar," UBS currency strategist Geoffrey Yu said.

At the same time, mounting signs that European growth is stumbling has stirred speculation the European Central Bank could edge towards trimming rates.

The high-yielding Australian AUD= and New Zealand NZD= dollars were initially hit, with the Kiwi nearing a four-month low hit earlier in the day before wiping the losses.

Antipodean currencies suffered after a survey showed business confidence in Australia hitting the lowest since September 2001 and housing finance falling sharply, while a report in New Zealand showed housing price gains slowing for an eighth straight month and projected to fall.

In the case of New Zealand, the country's central bank is now seen slashing rates by up to 125 basis points over the next year and thereby eroding the allure of the New Zealand dollar's 8.25 percent rate -- the highest among industrialised economies.

RBC strategists said in a note to clients they had added to their existing short NZD/USD position at $0.7650 and continued to target a move to $0.6900 in coming months.

"Near term, NZD faces further downside risks," they added.

But while analysts said there were many reasons for a fall in the kiwi, the case for a slide in the Australian dollar was not so clear-cut as the country's labour market is robust and high commodity prices provide an economic boon.

(Additional reporting by Naomi Tajitsu)

(Editing by Ron Askew)