FOREX-Yen hits 2-1/2 year peak as stocks dive

(Changes dateline, byline, updates prices, adds quotes)

By Simon Falush

LONDON, Jan 22 (Reuters) - The yen hit a 2-1/2-year peak against the dollar and high yielding currencies slid on Tuesday as tumbling Asian stocks and fears of a U.S. recession prompted investors to dump risky assets.

The Japanese currency also jumped to a five-month high against the euro and a 21-month peak versus sterling in volatile trade as concerns grew that economic woes in the U.S. were spreading to other major and emerging market economies.

The Nikkei stocks average .N225 and emerging equities .MSCIEF tumbled more than 5 percent and European stocks dropped as much as 4 percent.

"There is a panicky environment in the equity market ... this is leading to risk aversion increasing and the carry trade is now a thing of the past meaning there is continued strength in the yen," said Audrey Childe-Freeman, European economist at CIBC.

The dollar fell as low as 105.63 yen, according to Reuters data, its lowest in 2-1/2 years and is nearly 5 percent down this month, on track for the pair's biggest monthly loss since 2001.

FED CUTS AWAITED

The Federal Reserve meets on Jan. 29/30 but expectations are mounting that it may be forced to move earlier in an attempt to steer the U.S. economy away from a recession.

U.S. interest rate futures are now pricing in at least 75 basis points of cuts by the end of the month.

Investors are also pricing in a probable cut from the Bank of Japan by the end of the year.

The U.S. currency trimmed some losses to trade around 106.10 yen in late Tokyo trade, little changed on the day. The dollar has dropped nearly 5 percent against the yen so far this month, on course for its biggest monthly fall since 2001.

The euro fell to a five-month low of 152.12 yen EURJPY=R on EBS, while sterling fell as low as around 204.90 yen GBPJPY=R, the lowest since April 2006. Both pairs then trimmed some losses.

The euro fell to a one-month low of $1.4366 EUR=, in part dragged lower by weakness in yen crosses, while sterling hit a 10-month low of $1.9372 GBP=D4.

The euro has been weighed by increasing expectations that the European Central Bank will start cutting rates later in the year, following the Fed. At the same time, the sharp stock sell-offs prompted market players to price in more Fed rate cuts.