Yen steadies, investors cautious on risk

TOKYO, May 11 (Reuters) - The yen steadied after its broad gains in the previous session on Friday, after investors trimmed short positions on caution that falls in Asian stocks following a pullback in U.S. equity markets could prompt more risk-cutting.

If investors see severe pullbacks in global equity markets, traders said, they may decide to cut risky positions such as carry trades, in which low-yielding currencies like the yen are used to fund investment in high-yielding currencies and assets.

But if equity markets show resilience, investors may resume the carry trade and sell yen again.

''We will be watching how European and U.S. stocks perform today to see the yen's near-term direction,'' said a senior trader at a Japanese bank.

Tokyo's benchmark Nikkei share average was down 1.3 percent at midday, retreating from a 2-1/2-month high struck on Wednesday.

Other regional stocks fell about 1 percent, tracking a slump in the Dow Jones industrial average.

The dollar rebounded to 119.90 yen partly on buying by Japanese investment trusts, after falling as low as 119.71 yen earlier in the session. The U.S. currency marked a 2-1/2-month high of 120.54 yen in the previous session.

The euro recovered against the yen to 161.60 yen from the day's low of 161.28 yen hit earlier in Tokyo trade, but it stayed away from a record high of 163.60 yen hit last week.

''A fall in the euro looked to be a catalyst for the broad yen buybacks. But we don't know yet if this is only a part of an adjustment in yen short positions or the beginning of a new trend,'' said Takeshi Iba, head of the forex department at Calyon in Tokyo.

Higher-yielding currencies like the Australian and New Zealand dollars recouped losses against the yen after investors cut back their positions in carry trade overnight.

The Aussie was trading at 99.25 yen, well above a low around 98.60 hit in the previous session. The Australian dollar hit a 15-year high against the yen of 100.32 on Thursday.

RATES OUTLOOK Traders said falls in the euro and sterling against the dollar after key central bank meetings this week also prompted investors to sell those currencies against the yen.

The outcome of the meetings of the Federal Reserve, Bank of England and European Central Bank offered few surprises, giving dealers little incentive to further sell the dollar and buy the euro and sterling.

''The Fed doused speculation of an early rate cuts, and traders started cutting their short dollar positions,'' the Japanese bank trader said.

''And they continued to cut such positions against the euro and sterling as the results of both ECB and BOE policy meetings were in line with expectations,'' the trader said.

ECB President Jean-Claude Trichet stressed the need for strong vigilance to ensure stable prices in the euro zone after the ECB on Thursday held rates steady at 3.75 percent, as expected.

The euro stabilised against the dollar at $1.3485 after falling to a one-month low around $1.3465 in the previous session.

Sterling also steadied against the dollar at $1.9805, little changed from late New York trading. The Bank of England raised rates to 5.5 percent, also as forecast, but an accompanying statement neither promised nor ruled out further action going forward.

Traders were looking to U.S. producer price and retail sales data for April on Friday for clues on the health of the economy after the Federal Reserve said it was still concerned about inflation.

REUTERS AM SSC0937