LONDON, April 3 (Reuters)

[MickMason]

Courtesy of Reuters

LONDON, April 3 (Reuters)

By Natsuko Waki

LONDON, April 3 (Reuters) - The yen fell to a five-week low against the euro and a one-month trough versus the dollar on Tuesday as improving risk appetite on the back of firmer stocks prompted investors to chase high-yielding currencies.

Yield appeal pushed sterling up against the yen with the view growing that the Bank of England might raise British interest rates from 5.25 percent on Thursday.

Investors remained on data watch ahead of this week's key U.S. employment report, after soft U.S. manufacturing data on Monday failed to shake expectations for the Federal Reserve to cut rates at some point later this year.

The Australian dollar hit a 10-year high versus the yen and held near Monday's decade high against the dollar ahead of an Australian interest rate decision, where the market sees a better than even chance of a rate hike to 6.5 percent.

"We had a big rally in high-yielders. Funding currencies were left behind. We are having a move back into carry trades. Equity markets are rallying moderately and that's leading to a general rise in appetite for risk," said Adam Cole, currency strategist at RBC Capital Markets.

"But the dollar seems to be increasingly trading off its own economic news and we see risk skewed on the downside from (the jobs data)."

By 0930 GMT, the euro was up 0.6 percent at 158.31 yen after hitting 158.53, last seen on Feb. 27 when investors rushed to buy back the Japanese currency and unwind carry trades as global equity markets tumbled.

The dollar was up 0.7 percent at 118.67 yen while it was up 0.3 percent at 1.2185 Swiss francs .

The yen hit a 5-week low of 234.82 per sterling and a 10-year trough of 96.53 against the Aussie .

Tokyo stocks rose 1.27 percent on Tuesday, European shares traded higher and U.S. stock futures were pointing to a firmer start on Wall Street.

The euro was slightly down at $1.3350 , holding between $1.3300 and a two-year high of $1.3411 hit in March.


RISK APPETITE

One key driver of carry trades has been Japanese domestic investors who, frustrated by low rates at home, purchased higher-return overseas assets abroad -- a trend set to accelerate after the new fiscal year started on Monday.

Carry trades will remain at the mercy of risk appetite, but key indices were showing healthy conditions for risk.

The IMF/State Street Risk Appetite Index has hit 0.79, the highest level since September 2005, while the UBS Risk Index also stayed in a risk-seeking territory.

Investors awaited U.S. payrolls data on Friday for clues on the Fed outlook, as well as the RBA and BoE meetings to see whether the two central banks pull the trigger on higher rates or wait a little longer.

"Should the RBA indeed hike rates, the question for AUD will be whether it can break above US$0.82 on a sustained basis; such a move could open the door for further short-term gains," JP Morgan said in a note to clients.

For Tuesday, the main U.S. data event is the pending homes sales index at 1500 GMT, which is seen easing to 108.20 from 108.70 previously. Fresh signs of weakness in housing -- a major worry for the world's biggest economy -- could see firmer expectations for Fed easing.

In the euro zone, expectations are for the European Central Bank to raise interest rates again, as early as June. ECB Governing Council member Klaus Liebscher said monetary policy is on the accommodative side and said euro zone growth is robust.