The yen rose across the board on Friday, reversing losses made earlier this week as investors bought back the Japanese currency they had previously sold to buy higher-yielding assets. The dollar steadied against other major currencies, having hit a two-year low against the euro on Thursday.
After the Federal Reserve left rates steady at 5.25 percent and dropped language in previous statements about further tightening. The yen had also fallen after the Fed's more neutral stance aided risky assets, but investors, with fresh memory of a sharp carry unwinding earlier this month, were on Friday taking profit on their positions before the weekend.
"We've obviously seen quite a strong performance of carry trades since Wednesday when the Fed changed the bias. Investors are much more nervous than (early 2007) because you've seen a massive correction and you've seen carry trades are not a one-way street," said Michael Klawitter, currency strategist at Dresdner Kleinwort.
"So carry trades are held in much shorter duration and profit taking takes place early." By 1157 GMT the dollar was down 0.3 percent at 117.72 yen. The euro was down 0.5 percent at 156.71 yen. The euro was down 0.1 percent on the day at $1.3313 after hitting a two-year high of $1.3411 on Thursday.
The global market turmoil of late February-early March, triggered by concern about the US subprime mortgage market and a sell-off in stocks, boosted risk aversion, prompting investors to unwind risky carry trades.
Back then the yen made its biggest one-week gain since August 2003 against the euro. Currencies have stabilised since, but focus is shifting to the health of the US economy especially as investors expect the Federal Reserve to cut interest rates this year.
"With the Fed expressing a more neutral view on policy options now, the rate market and USD are likely to remain very sensitive to signs of weakness in key economic indicators," UBS said in a note to clients.
For Friday investors are awaiting US existing home sales for February at 1400 GMT. Analysts expect the figures to fall to 6.31 million from January. Japan's top financial diplomat Hiroshi Watanabe said the subprime mortgage crisis was unlikely to spread to the wider US hosing market and hurt the economy.
US short-term interest rate futures priced in about a 30 percent chance of a rate cut by the end of June, down from about 50 percent just after the Fed's statement on Wednesday.