FOREX-Dollar holds firm, yen feeds global risk appetite

By Wayne Cole

SYDNEY, May 3 (Reuters) - The U.S. dollar was a shade firmer on Thursday, building on several weeks of gains as firm U.S. economic data was taken as lessening the chance of an interest rate cut from the Federal Reserve.

Meanwhile, the yen languished near recent lows on signs investors were still happy to borrow in yen to buy riskier assets, notably equities. The Dow Jones industrials index hit a record high on Wednesday while the S&P 500 reached a six-year peak. Share markets in Europe and most of Asia also rallied. "Global economic growth is strong, if not actually accelerating again, so it's no surprise that the appetite for risk is still healthy," said John Kyriakopoulos, a currency strategist at nabCapital.

"At the same time, weak inflation in Japan means a rate rise there is unlikely, so people are comfortable running the carry trade in yen," he added.

The dollar inched up to 120.19 yen JPY=, from 120.08 late in New York on Wednesday, to be just short of two-month highs around 120.30 yen. The euro held at 163.32 yen EURJPY=, having hit a record high around 163.87 on Wednesday.

The single currency drifted off to $1.3586 EUR=, from $1.3592 in New York, extending a pullback from last week's record high above $1.3680. Trade was thin with Japan and China on holiday and many investors awaiting data on the giant U.S. service sector to provide fresh guidance on Friday's payrolls report.

The Institute for Supply Management (ISM) measure on services is seen edging up to 53.0 in April, from 52.4 in March. Analysts will pay close attention to the employment indicator to see if weakness in the U.S. housing sector is seeping into job losses. "The market's built a big speculative short position in the dollar and it needs a steady diet of bad news to justify it," noted Kyriakopoulos.

"But the economic news from the States has actually been a bit better recently," he added. "What the speculative bears need is a payrolls gain under 100,000 and maybe a tick up in the jobless rate."

Median forecasts are that payrolls rose 100,000 in April, while the unemployment rate edged up to 4.5 percent from 4.4 percent.

"Anything weaker than consensus would reinforce the story of weakening jobs growth and Fed easing down the track," said Rory Robertson, an interest rate strategist at Macquarie Bank.

"The ongoing slump in home-building and weakness in business investment suggests that jobs growth will slow further, perhaps significantly," he added.

In such a scenario, it would be reasonable to expect the Fed to cut its funds rate gradually, say to around 4.5 percent from the current 5.25 percent, he argued.

"But nothing happens on Fed policy until something disturbing happens on the U.S. jobs front," concluded Robertson.

Elsewhere, sterling steadied at $1.9899 GBP= after falling 0.5 percent on Wednesday amid speculation the Bank of England might not tighten policy as much as bulls had thought.

A UK rate rise next week is already fully discounted but the market had also been pricing a chance of further hikes beyond that.