The yen fell slightly on Thursday after a recent rally in the Japanese currency as rebounding stock markets eased investor jitters, making them less reticent about taking on riskier yen-funded carry trades.
US producer prices, capital flows and factory data will be closely watched when they are released later in the session given that the recent rise in risk aversion was in part prompted by concerns about the health of the world's largest economy.
Sharp falls in equity markets had curbed risk appetite and made currency investors less keen to borrow low-yielding currencies like the yen to fund investments in higher return units such as sterling or the dollar.
Now, a recovery in shares has prompted some to go back into carry trades, which still look attractive from a yield perspective with Japanese rates at just 0.5 percent compared with 5.25 percent in Britain and 7.5 percent in New Zealand. "Everything is tracking stocks right now, pretty much tick-for-tick," Ardash Sinha, currency strategist at Barclays Capital, said.
European stocks rose 1.8 percent after similar gains in Tokyo's Nikkei index overnight and advances on Wall Street on Wednesday. By 1200 GMT, the dollar was up 0.2 percent at 117.27 yen and the euro was up 0.1 percent at 155.03 yen.
Sterling, which had been a key beneficiary of carry trades and has therefore suffered more than some of the other currencies during their unwinding, was up 0.2 percent at 227.0 yen.
The euro ticked down slightly to $1.3211. The European currency was little moved by data confirming eurozone inflation at 1.8 percent year-on-year in February. European Central Bank Governing Council Member Axel Weber attempted to soothe troubled market waters, saying that while the recent financial market correction was a timely reminder of the risk of foreign exchange carry trades, it should not be dramatised. Analysts said central banks would be worried if the unwind gathered momentum. "They would be concerned if this became disorderly and we saw a complete unwind," Sinha said.
Fellow Governing Council member Klaus Liebscher said that eurozone monetary policy remained relaxed given strong economic growth and that he saw inflationary risk rising towards the end of this year.