* Dollar rallies from five-week lows vs yen
* Stock markets turn higher, but extremely volatile
* RBA rate cut keeps focus on lower global rates
(Recasts, adds quotes, updates prices, changes byline,
dateline; previous LONDON)
By Gertrude Chavez-Dreyfuss
NEW YORK, Dec 2 (Reuters) - The U.S. dollar fell against
the euro and a basket of currencies on Tuesday as a rebound in
stock markets encouraged investors to emerge from the shelter
of U.S. assets.
U.S. and European stocks <> rose, which weighed on
the yen, although investors remained apprehensive as they
braced for dramatic interest rate cuts later in the week.
The U.S. and Japanese currencies have found support in
recent months as investors cut exposure to riskier assets
financed by cheap yen and dollar loans. U.S. portfolio
investors have also moved funds back to their domestic market,
which has also boosted the greenback since August.
"There seems to be reduced risk aversion in the market
because of the rally in equities and that has pressured the
dollar against the euro and weighed on the yen," said Matthew
Strauss, senior currency strategist, at RBC Capital Markets in
Toronto.
"But this doesn't mean that investors are willing to get on
risky trades again. We are still in a period of extreme
uncertainty. I still believe the strong dollar trend is still
in place given that the euro has never been able to sustain
gains above $1.27."
In early New York trading, the euro rose 0.5 percent
against the dollar to $1.2691 <EUR=> and gained 0.9 percent
versus the yen to 118.70 <EURJPY=>.
The ICE Futures' dollar index <.DXY>, a gauge of the
greenback's value against six major currencies, weakened 0.5
percent to 86.620.
The dollar <JPY=> rose 0.3 percent against the yen to 93.48
It fell as low as 92.64 yen earlier, the lowest since Oct. 28,
according to Reuters data..
GLOBAL RATES IN FOCUS
Risk appetite also improved, analysts said, after the Bank
of Japan held an emergency policy meeting on Tuesday and
announced it will accept a wider range of corporate debt as
collateral in money market operations to help unfreeze credit
markets. For details, see [].
The BoJ held interest rates steady at 0.3 percent as
expected at the meeting.
An unexpectedly bold 100 basis point cut from the Reserve
Bank of Australia had earlier kept the Australian dollar under
pressure, although the currency has since recovered with the
rise in stocks. The Australian dollar rose 0.4 percent versus
the greenback to US$0.6425 <AUD=>.
The RBA's move has raised expectations other central banks
may follow suit with aggressive easing in Britain, the euro
zone, Sweden and New Zealand this week to revive their flagging
economies. That should further support the U.S. dollar as the
rate cuts would shrink the yield advantage of currencies such
as the euro and sterling.
A steep slide in the yuan to the bottom of its trading band
against the dollar has also boosted the U.S. currency, analysts
said, because it fueled speculation China may be shifting its
forex policy to allow a weaker yuan to stimulate the economy.
In other currencies, sterling rose 1 percent to $1.5051
<GBP=>, despite the view that the Bank of England will slash
rates by as much as 100 basis points on Thursday, one month
after chopping them by 150 basis points to 3.0 percent.
Also on Thursday, the European Central Bank is seen cutting
rates by at least 50 basis points from 3.25 percent and
possibly more. Market participants, meanwhile, expect the
Reserve Bank of New Zealand to cut rates by 100 basis points or
more from 6.5 percent.
Brown Brothers Harriman believes that much like the Federal
Reserve, other central banks, with little room to cut rates,
such as the Swiss National Bank, may have to resort to
quantitative measures to ease monetary policy.
"Such steps may not have an immediate impact on the
currency markets but do indicate central banks are not out of
ammunition," said the U.S.-based investment bank.
(Additional reporting by Naomi Tajitsu in London; Editing by
Tom Hals)
