The dollar rose against the yen on Wednesday in volatile trading, as investors tracked choppy movements in U.S. equities and pared back extreme positions on the Japanese currency that had built up on recent credit concerns.
Global financial markets have been pounded over the past month by a wave of risk aversion sparked by worries over the state of credit markets worldwide. Troubles started in the high-risk U.S. subprime mortgage sector, and have now spread and affected credit markets globally.
U.S. equities were mostly higher on Wednesday, as energy shares rose as U.S. oil futures hit a record high after data showed U.S. crude oil stocks fell.
As a result, the dollar has come off its highs against the yen.
"We have a skittish market and investors are taking their cue from the stock and credit markets," said Shaun Osborne, chief currency strategist at TD Securities in Toronto. Equities and carry trade currency pairs such as euro/yen and dollar/yen have risen and fallen together in recent sessions due to the perception of relatively high risk that each investment holds. In carry trades, investors borrow in a low-yielding currency to invest in higher-yielding assets.
"But we should see more pressure on carry trades -- euro/yen, dollar/yen and the high-yielding currencies," Osborne added.
In midday trading, the dollar reversed losses to stand 0.3 percent higher on the day at 118.70 yen (JPY-EBS), around a yen above 117.60, the lowest since April, according to electronic trading platform EBS. The euro was buying 162.32 yen, up 0.3 percent and also off three-month troughs (EURJPY-EBS) around 160.47.
"We're seeing an initial short-covering in short dollar/yen positions after sharp moves," said David Watt, senior currency strategist at RBC Capital Markets in Toronto.
Markets earlier showed little reaction to data from the Institute for Supply Management that showed a key manufacturing index was lower than expected.
The dollar however, slid against the euro after a report showing the U.S. economy added just 48,000 private sector jobs in July, way below the median forecast of 100,000.
The euro was flat against the dollar at $1.3676.
The report put out by ADP Employer Services suggested Friday's closely watched Labor Department payrolls data may come in lower than expectations.
Over the past few sessions, investors have paid little attention to U.S. economic data as they focused on developments in the U.S. credit and housing markets.
News reports that U.S. mortgage lender American Home Mortgage Investment and two Australian funds were the latest casualties in the currency global credit crisis, for instance, had pushed the yen to three-month highs earlier.
The fall in U.S. shares on Tuesday, after American Home Mortgage Investment said it could not fund home loans and might have to liquidate assets, battered European equities on Wednesday.
That was on top of news that Australia's Macquarie Bank warned investors of losses in two bond funds after the credit market troubles in July.
These events, along with a spike in credit spreads, prompted currency traders to cut exposure to riskier assets by buying back the low-yielding yen and selling higher-yielding currencies like the Australian and New Zealand dollars.
The Australian dollar fell 0.4 percent to 101.17 yen, recovering from a two-month low of about 99.52 yen.
Sterling and the New Zealand dollar also recovered from earlier two-month lows versus the yen.