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By Jamie McGeever
LONDON, July 31 (Reuters) - High-yielding currencies recovered ground on Tuesday while the yen and Swiss franc slipped, as rebounds in equity and credit markets tempted investors back into carry trades.
The recent heightened nervousness over tightening credit conditions cooled on Tuesday, prompting traders to once again sell low-yielding currencies for higher yielding, riskier assets.
Sterling and the Australian and New Zealand dollars gained, while the yen and Swiss franc slipped. Ahead of a batch of U.S. economic reports later in the day, the dollar eased modestly.
"The market has been quite stoical in the face of a number of risks. It's not that it's really forging ahead, but European stocks and emerging stocks are up," said Neil Mellor, currency strategist at The Bank of New York.
"We felt the chances were pretty high that the market would look to get back into the carry trade as soon as possible, and view the pullback as a buying opportunity," Mellor said.
The risk-seeking mood helped the high yielding Australian <AUD=> and New Zealand <NZD=> dollars bounce 0.4 percent and 0.2 percent versus the U.S. currency, respectively.
At 1000 GMT the euro was up 0.1 percent on the day at 163.10 yen <EURJPY=>, about half a yen above Monday's three-month lows. The dollar stood at 119.05 yen, almost a full yen away from the three-month trough set at the height of risk aversion the previous day <JPY=>. The euro was up 0.1 percent at $1.3705 <EUR=>, sterling was up 0.4 percent at $2.0325 <GBP=>, while the dollar index retreated from three-week highs to stand around 80.725 (.DXY: Quote, Profile, Research).
The dollar and euro were both up around 0.2 percent against the Swiss franc at 1.2040 <CHF=> and 1.6515 <EURCHF=> francs, respectively.
HEAVY DATA FLOW
"There's a bit of a stabilisation all round, but still far from recouping the losses we saw last week," said Tobias Thygesen, senior analyst at Danske Markets in Copenhagen.
"But renewed credit concerns could spark risk aversion again and then we'll see carry underperformance and the yen strengthening a bit again," he added.
The iTraxx Crossover index of 50 mostly "junk" rated bonds tightened to around 400 basis points from Monday's life highs above the 500 mark. After five sessions of losses, European shares were marching higher on Tuesday, with the FTSEurofirst 300 (.FTEU3: Quote, Profile, Research) index up 1.75 percent and the three major U.S. stock futures pointing to a higher open on Wall Street.
Figures released earlier showed euro zone annual inflation easing to 1.8 percent in July from 1.9 percent in June, and euro zone unemployment at a record low of 6.9 percent.
Nonetheless the euro zone releases are unlikely to change expectations for at least one more rate hike this year.
In the United States, Tuesday's releases include the core personal consumption expenditure (PCE) price index for June, the Federal Reserve's favoured inflation gauge.
The Chicago purchasing managers' index and consumer confidence data, both for July, will also be released.
But investors will still be on full-scale credit watch.
"These (data) outcomes should weigh slightly on ... the dollar but are unlikely to move markets very much given the continuing focus on the risk of credit contagion," Barclays Capital strategists wrote in a note to clients.
The futures market now factors in a 60 percent chance of a the Fed trimming rates by 25 basis points by year-end.
A move by hedge fund Citadel Investment Group LLC could help calm concerns about a credit crunch. Citadel said on Monday it took over Sowood Capital's credit portfolio after Sowood suffered heavy losses from bond trades.