The dollar turned higher against the yen Wednesday in choppy trading after U.S. stocks rallied midafternoon, reversing earlier declines.
The greenback has tracked moves in equities as investors have shed riskier assets in the last two weeks, pushing U.S. blue chip stocks to their lowest since November while driving U.S. Treasury prices higher.
"Dollar/yen is going higher because of this rally in the Dow Jones index," said Rafael Martorell, chief foreign exchange dealer at BNP Paribas in New York.
"Currencies are extremely well-correlated with stocks. Today's price action suggests the correlation is intact," he added.
U.S. stocks rose in midafternoon trading after falling earlier, as investors bought recently beaten-down companies and energy shares in line with higher oil prices.
Traders, however, remained cautious, amid worries troubles in the U.S. subprime mortgage market could spread to other sectors of the economy.
"These potential subprime issues are going to linger for a while," said Dustin Reid, currency strategist with ABN AMRO in Chicago.
The euro came off highs against the dollar, but still up on the day. It reached as high as $1.3246 around midday as U.S. equities weakened. Sterling erased overnight losses.
The yen jumped more than 1% against the dollar on Tuesday as global equity markets sold off on signs of more trouble among U.S. subprime mortgage companies, which lend to high-risk borrowers.
The yen has gained about 4% in the last two weeks as a rise in risk aversion sent market participants scurrying for the exits on carry trades, in which investors borrow in a low interest rate currency to buy a higher-yielding currency and profit on the spread.
"It's still about the carry trade, so maybe we're having a pullback now but I still think we'll see the yen stronger," said Liz Bussanich, senior vice president with BMO Capital Markets in New York.