Yen strengthens in London

The yen strengthened on Tuesday as softer equity markets signalled a return to risk aversion for nervous markets ahead of a flurry of US data due late in the session, leading investors to unwind carry trade positions.
The high yielding New Zealand dollar fell 1 percent versus the yen as investors moved out of carry trades, in which they borrow low yielding currencies to fund purchases of higher return assets. European bourses eased and US stock futures pointed to a weak start on Wall Street after a three-day weekend as investors remained wary about the health of the US economy following recent turbulence caused by problems in the housing market.
"We might see a second wave of yen strength over the next couple of days (due to) slightly weaker equity markets and we think there will be some more news on the subprime," said Marcus Hettinger, Global FX Strategist at Credit Suisse in Zurich.
"We have a lot of economic indicators this week and people are still risk averse, which should be positive for low yielding currencies like the yen." By 1125 GMT the euro was down two thirds of a percent versus the yen at 156.80 and also fell against the dollar to $1.3580.
The dollar lost 0.3 percent to 115.45 yen. The New Zealand dollar fell 0.6 percent against the greenback and 1 percent versus the yen. The US Institute for Supply Management's index on manufacturing due at 1400 GMT is seen slipping to 53.0 in August from 53.8, but well above the 50 mark between growth and contraction This will be one of the first indications of how the world's biggest economy fared during last month's market turmoil.
"The downside drift might have more impact on the dollar in a negative way, as strong data might be viewed sceptically under the current uncertainty," Citigroup said in a research note. In case of a strong ISM, analysts expect market reaction to be relatively muted, with investors opting to bide their time until Friday's US non-farm payrolls report.
The high-yielding Australian dollar held up well in the face of heightened risk aversion, supported by surprisingly strong second quarter growth data which has boosted the case for further rate hikes from the current 6.50 percent.
This week, though, markets and analysts alike expect the Reserve Bank of Australia to keep rates unchanged. For the European Central Bank, the latest Reuters poll gave a median 40 percent chance of a rate hike on Thursday.
The ECB last raised rates in June, to 4.0 from 3.75 percent, and was widely expected to tighten policy again this month until the flare-up of market volatility. The Bank of Japan is also seen keeping interest rates on hold at 0.5 percent in the coming months, especially after a surprise decline in capital spending in the second quarter which could result in an economic contraction for the second quarter.