U.S. dollar falls vs euro; yen drops on easing view

NEW YORK (Reuters) - The dollar slipped against the euro while the yen fell on Wednesday, as risk appetite improved in general with a rise in European and U.S. stocks, boosting demand for higher-yielding but riskier currencies.

In the case of the yen, a Reuters story saying Japan's central bank may ease policy as early as next week pushed the Japanese currency to lows against the dollar and the euro.

"It's still a risk play. We saw gold and oil come off and that caused the dollar and yen to recover a bit, but overall the euro is still higher and dollar/yen is still up," said John McCarthy, director of foreign exchange at ING Capital Markets in New York.

He said the market is still in a "buy dollar" mode, "but selectively," with investors still taking long bets on the greenback versus the euro and sterling, but not against the Norwegian and Swedish crowns.

In late afternoon trading, the euro rose 0.4 percent to $1.3650 after hitting a session low of $1.3546 and a peak of $1.3679.

Trading in the euro was volatile with the currency swinging between gains and losses against the dollar. The euro rallied 0.9 percent against the yen, but that was more on yen weakness.

Comments on Wednesday from European officials about Greece, including those from Greek Prime Minister George Papandreou, had little impact on the euro. Those remarks, though, did add to the overall view that Greece's debt crisis may be easing.

The dollar was up 0.6 percent versus the yen at 90.51 yen after climbing as high as 90.82, according to Reuters data.

Looking forward, yen repatriation flows are expected to benefit the Japanese currency, as Japan's corporations looked to bring offshore earnings back home for their fiscal year-end this month.

But yen gains are expected to be short-lived as Japan's economy grapples with deflation. The BoJ is leaning toward easing monetary policy again next week, sources said, but there is disagreement among policy makers on its board on how to justify such a move.

The pound, meanwhile, already under pressure, dipped after an unexpected drop in British industrial production data for January.

Sterling was down 0.2 percent at $1.4967, maintaining its downtrend amid worries about Britain's credit-worthiness and political uncertainty. Wednesday's weak industrial data added to the gloom.

Commodity-linked currencies rose after China reported on Wednesday that exports and imports surged past expectations in February, underscoring the momentum in the world's third-largest economy.

The Australian dollar rose to a seven-week high against the U.S. dollar, according to Reuters data, but was trading at US$0.9149, up 0.1 percent.

The New Zealand dollar traded lower, falling from five-week highs after the Reserve Bank of New Zealand kept rates unchanged at 2.5 percent, as expected, but said higher funding costs will cut the future extent of rate hikes. This suggested there will be less tightening from the RBNZ than many initially thought.

It was last at US$0.7019, down 0.1 percent.

(Additional reporting by Nick Olivari; Editing by Kenneth Barry)