CORRECTED - FOREX-Dollar recovers post-Fed losses as stocks fall

(Corrects level of Fed rates in paragraph 3)

By Toni Vorobyova

LONDON, Jan 31 (Reuters) - The dollar recovered from an earlier two-month low against a basket of currencies on Thursday as investor focus switched to troubles in the financial sector and away from the previous day's hefty U.S. interest rate cut.

Fitch Ratings on Wednesday downgraded the credit ratings for Financial Guaranty Insurance Company's (FGIC) main bond insurer unit, stoking worries about possible downgrades for other companies in the sector, like MBIA and Ambac.

U.S. equity markets -- which had been boosted by the Federal Reserve's 50 basis points rate cut to 3.00 percent -- reversed their gains, while the dollar benefited from repatriation flows as investors ditched risky investments.

"There was the knee jerk reaction you'd expect (to the Fed) with stock markets rallying, and risky assets rallying and the dollar under pressure. But the U.S. (stock) markets didn't hold onto their gains and a lot of the move's reversed," said Martin McMahon, FX strategist at Credit Suisse in Zurich.

"There's some more bad news on monolines which is spooking investor sentiment on the general financial sector... The dollar's been gaining in the past couple of weeks when stock markets are losing out as a kind of defensive play."

By 0826 GMT the dollar was up a third of a percent against a basket of major currencies at 75.272, bouncing up from an earlier two-month low of 74.972 .DXY.

The euro rose as high as $1.4914 in the aftermath of the Fed cut EUR=, but ran into tough resistance around that level, prompting a retreat back down to around $1.4850 EUR=.

The dollar hit a record low of 1.0798 Swiss francs CHF= before reversing the move in early European trade.

Stock moves have been a major driver for currencies, as investors see share markets as a barometer for risk.

Overall weakness in share prices has prompted market participants to unwind risky positions such as carry trades, in which the low-yielding yen and Swiss franc are used to finance purchases of higher-yielding assets elsewhere.

Highest yielders like the Australian AUD= and New Zealand NZD= dollars weakened against the U.S. currency and the yen.

Japan's Mizuho Financial Group said its subprime losses to end-December amounted to 345 billion yen. The financial sector will remain in focus next week, as the 2007 earnings reporting season kicks off amongst major European banks.

NEXT FOCUS - PAYROLLS

The Fed's cut on Wednesday follows on from a 75 basis point inter meeting move last week, bringing the monetary easing administered since September to 225 basis points.

That leaves U.S. rates the lowest among developed countries except Japan and Switzerland, and the Fed warned more cuts may be needed to shore up the weakening U.S. economy.

A Reuters poll showed 15 out of 16 primary dealers on Wall Street surveyed after Wednesday's rate cut expect the central bank to trim rates again at its next meeting in March. [FED/R]

However dealers were careful about selling the U.S. currency too aggressively ahead of the main monthly employment report on Friday.

Data on Wednesday showed U.S. private employers added more jobs than expected in January, prompting some analysts to raise their forecasts for the official non-farm payrolls report.

Thursday features the release of December personal consumption expenditure figures -- the Fed's favourite inflation measure -- as well as weekly jobless claims, both at 1330 GMT.

"In light of the stronger than expected ADP report on Wednesday and positive details in Tuesday's (consumer) confidence report that suggest labour markets seem to be holding up better than expected, claims will be important in confirming this view," JP Morgan said in a research note.

"Nonetheless, these reports remain a wildcard as job growth tends to gap lower rather than trend during recessions."

Economists expect the U.S. economy to have added 63,000 jobs in January after creating only 18,000 jobs in December. [ECI/US]