By Vivianne Rodrigues
NEW YORK, Dec 24 (Reuters) - The yen dipped to a six-week low against the dollar on Monday and fell against the euro as a pre-Christmas equities rally boosted investors' risk appetite.
Sterling also fell to a record low against the euro for the second straight session after weak UK housing data reinforced expectations for more Bank of England interest rate cuts in 2008, possibly as soon January.
Trading activity was light as Tokyo and some European centers were closed for holidays, while U.S. activity wound down.
For those still active ahead of Christmas, guarded optimism seemed to be the prevailing mood, with global stock market gains prompting a move back into carry trades, which use cheaply borrowed yen to buy higher-yield assets.
The Japanese currency "is still vulnerable to spikes in risk aversion. However, as we move into year-end markets seem relatively calm," Camilla Sutton, a currency strategist at ScotiaCapital in Toronto, said. "We expect the current upward USD/JPY trend to continue."
Investors also welcomed brokerage Merrill Lynch's (MER.N: Quote, Profile, Research) announcement that it plans to sell most of its capital lending business to General Electric Co's (GE.N: Quote, Profile, Research) finance arm and get a capital infusion of up to $6.2 billion in a private placement with Singapore state investor Temasek Holdings [TEM.UL] and Davis Selected Advisors, a U.S.-based asset manager.
"In holiday-thinned trade, investors are trying to lock in high-yielders, so you see the yen and Swiss franc doing badly and the higher yielding currencies, including many emerging market currencies, doing well," said Marc Chandler, senior currency strategist at Brown Brothers Harriman in New York.
In early afternoon trade in New York, the dollar was up 0.3 percent at 114.42 yen <JPY=>, its highest level since Nov. 7. The euro was up 0.5 percent at 164.73 yen <EURJPY=> and also gained 0.3 percent to $1.4401 <EUR=>.
"The improvement in risk gauges -- such as firmer equities and softer bonds and drops in volatilities -- have helped propel market risk sentiment, which is helping the euro. The key thing to watch here is euro/yen," said Lena Komileva, G7 market economist at Tullett Prebon.
The euro also rose to a record high of 72.84 pence <EURGBP=>, up 0.6 percent on the day, after British data showed annual house price inflation in England and Wales at its lowest point in 1-1/2 years in December. That added to concern about a slowing UK economy and expected Bank of England rate cuts.
Markets expect both the BoE and the U.S. Federal Reserve to cut rates next year, but the European Central Bank is seen keeping rates on hold to fend off inflation pressures. That's helped keep the euro bid against the U.S. and UK currencies.
Sterling also fell 0.4 percent to $1.9764 <GBP=>, and Chandler said the combination of more BoE cuts and recent strong U.S. consumption data suggest the dollar has bottomed against the British currency.
The high-yield Australian dollar <AUD=> rose 0.4 percent to US$0.8707. The New Zealand dollar <NZD=> climbed 0.5 percent to US$0.7669. (Additional reporting by Steve C. Johnson; Editing by Leslie Adler)