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HONG KONG (Thomson Financial) - The US dollar held steady against the euro and yen in afternoon trade in Asia Friday ahead of the Federal Reserve's policy meeting next week.

"The market is anticipating another Fed rate cut again, but they are divided on the size of the reduction," said Mark Wan, chief analyst at Hang Seng Investment Services Ltd.

On Tuesday the Fed surprised the market by announcing a deep 75 basis point rate cut, a week before its next scheduled meeting, on Jan 29-30. The rate cut triggered a stock market rally in Asia Wednesday and European shares posted strong gains yesterday.

At 1.00 pm (0500 GMT), the dollar was at 107.15 yen, little changed from 107.18 yen in Sydney this morning. The euro was at 1.4750 dollars, little changed from 1.4756.

The Fed will likely cut its key rate by a quarter of a percentage point, Wan said.

"I don't think they need to cut it by 50 basis points," he said.

The dollar will likely hit 106 yen and the euro will reach 1.490 dollars at the end of this quarter, said Callum Henderson, head of currency strategy at Standard Chartered Bank.

The European Central Bank (ECB) is unlikely to raise its key rate and is more likely to lower it, despite hawkish comments by top ECB officials, Henderson said.

ECB council member Axel Weber took a dismissive tone on a euro-zone rate cut Thursday, adding weight to ECB president Jean-Claude Trichet's statement Wednesday, which suggested he is sticking with his anti-inflation stance and will not follow the Fed in cutting rates.

"Heading into the second half, they will likely cut rather than hike interest rates," said Henderson.

The ECB is under pressure to follow its peers in the US, the UK and Canada in lowering borrowing costs to help ease credit and encourage consumers and businessmen to borrow, spend and invest and thus help the global economy avoid a recession.

The yen, which weakened today from 106.85 yen to the dollar in late New York trade, is losing some support as equity markets around the world start to recover from steep losses seen at the start of the week, said Sally Auld, a senior currency strategist at ANZ Investment Bank.

"The yen is the currency of choice when there's uncertainty, so it's a touch weaker against the dollar, though broadly steady," Auld said.

The world's financial markets have radically changed since the start of the week when "doom and gloom" dominated all markets, said John Noonan, an analyst at Thomson IFR.

The emergency Fed rate cut proved to be a circuit breaker for the ailing equity markets, Noonan said.

That move has been backed up with what are perceived to be genuine efforts by US lawmakers to deal with the specific problems facing the US economy such as consumer spending, mortgage stress and the prospect of more downgrades of bond insurers.

The US Congress and administration yesterday agreed on a plan to extend tax rebates to 117 million families and for some incentives for businesses. It was part of the 145 billion dollar economic stimulus package unveiled last week by President Bush.

"While these efforts may not head off a US recession they may ensure that a US slowdown will be shallow and short-lived and not put a severe dent into the global growth outlook," Noonan said.

"If this more buoyant mood continues to prevail, it would provide enormous support for the Australian dollar," Noonan said.

The Australian dollar last traded at 88.33 US cents, up from 88.29 cents this morning.

Hong Kong 1.00 pm (0500 GMT)

US dollar

107.15 yen

1.0884 sfr

Euro

1.4750 usd

158.39 yen

1.6059 sfr

0.7453 stg

Sterling

1.9784 usd

212.48 yen

2.1543 sfr

Australian dollar

0.8833 usd

0.4467 stg

94.94 yen

New Zealand dollar

0.7710 usd