Yen steadies

The yen steadied against other major currencies on Monday as investors watched to see if a money market squeeze from the spreading US subprime mortgage distress would worsen and spark further unwinding of carry trades.
The Japanese currency gave up some gains on Friday after striking a four-month high against the euro as major central banks pumped in about $150 billion in overnight funds for a second straight day to relieve the tight conditions in money markets.
Currency movements were quiet in Tokyo as investors kept an eye out to see if money markets start to function more normally and if equity and corporate bond markets settle down from the sharp volatility of the past few weeks on the spreading jitters about big bank and fund losses.
"The market's focus is on overseas stock markets and whether they begin to stabilise after recent volatility," said a trader at a US brokerage in Tokyo. He added that markets may remain shaky in the near term, which could put upward pressure on the yen this week. In addition, traders said the absence of many Japanese market players at the peak of the summer holiday season this week may increase market volatility and exaggerate yen gains.
The Bank of Japan injected 600 billion yen ($5.1 billion) of funds into the banking system via a one-week operation to cool the rise in overnight rates, but the fallout in Tokyo's money market has been limited so far. Markets remained rocky, with Japan's Nikkei share average erasing an early dip to end up 0.2 percent, while other Asian equity markets also made a tentative recovery.
Analysts said the dollar and other currencies were at risk of a deeper pull-back against the yen as long as fears about credit markets lingered. "The moves by central banks have only calmed down markets intraday. The central banks cannot ease the concerns over subprime loans," said Masafumi Yamamoto, a currency economist at Nikko Citigroup.
The yen has rebounded across the board as investors have cut short positions in the low-yielding Japanese currency, which has been widely used by speculators as a cheap source of funds to buy higher-yielding currencies in risky carry trades.
The dollar slipped 0.1 percent from late US trade to 118.25 yen, holding off the four-month low of 117.19 yen hit on electronic trading platform EBS last week.
The high-yielding Australian dollar soared after the country's central bank lifted forecasts for underlying inflation and future growth, stoking expectations for higher rates after an increase to 6.5 percent last week.
The Aussie traded 0.5 percent higher at $0.8485, after jumping as high as $0.8505 and pulling away from a six-week low hit on Friday. The euro slipped 0.15 percent to 161.90 yen, but stayed above a four-month low of 159.98 yen hit on Friday.
The single currency was little changed at $1.3690, holding off the all-time high of $1.3853 reached in July. The dollar has edged up from a 15-year low against a basket of currencies struck a week ago as volatility has prompted market players to trim hefty bets against the US currency.
The dollar has gained even as expectations of a Federal Reserve rate cut to ease the market turbulence have soared, with futures markets pricing in a nearly 100 percent chance of a rate cut at the US central bank's next meeting on September 18.
Before conditions deteriorated in money markets, the Fed kept rates steady at 5.25 percent last Tuesday and reiterated that it expects moderate growth even while acknowledging the heightened market volatility.
Some traders doubted whether the Fed could resort to a rate cut next month to help relieve markets unless conditions deteriorated further or upcoming data was weak enough to justify such a move.