The yen edged up against the dollar and euro on Monday as Asian stock markets trimmed gains and investors remained anxious about more trouble in credit markets from losses tied to US subprime mortgages.
The yen initially dipped as regional equities tracked a solid rise on Wall Street late last week, whetting investor appetite for riskier investments like carry trades - using the low-yielding Japanese currency to buy higher-yielding ones.
But the reports of German state-backed bank LBBW buying subprime victim SachsenLB and the departure of the European structured finance chief at Barclays Capital kept some investors on edge, traders said. The China Construction Bank, one of the country's top four state lenders, said on Monday it held about $1 billion of US subprime mortgages.
"A few more of these stories are doing the round-about on the problems people are having," said Rick Lloyd, head of G10 currency trading at ABN Amro in Singapore. "The jury's definitely out on what's going to happen. I can't imagine that we're not going to have some more surprises at some stage. So I can't say it's safe to jump back on the carry trade just yet," he said.
Traders were also cautious as regional stocks relinquished gains, with Japan's Nikkei share average rising just 0.2 percent after having pushed up 1.6 percent at one point. Activity was subdued with markets in London set to be closed for a bank holiday, making moves exaggerated.
The dollar slipped 0.2 percent from late US trade to 116.20 yen still holding off a 14-month low of 111.60 yen hit earlier in the month. The euro dipped 0.3 percent to 158.90 yen after an early rally to 159.68 yen, its highest in nearly two weeks.
The euro was little changed at $1.3670 after hitting a two-week high of $1.3685 in early Asian trade, while the Australian dollar rose 0.3 percent to $0.8230.
Investors are looking ahead to a speech from European Central Bank President Jchet for clues on whether an interest rate increase at its next policy meeting is still possible. ECB sources told Reuters late last week that the central bank is not set on a September rate lift to 4.25 percent from the current 4.0 percent.
Market participants also kept an eye on Japanese Prime Minister Shinzo Abe announcing a new cabinet on Monday to shore up faltering support. State broadcast NHK said Fukushiro Nukaga, a former defence minister, was tapped to replace Koji Omi as finance minister. Analysts expected little market impact from the reshuffle.
Stock and credit markets have calmed, especially since the Federal Reserve cut its discount rate and has taken action to help mitigate the fallout from the subprime mortgage crisis, stoking expectations a cut in the 5.25 percent fed funds rate is coming. The S&P 500 index posted its biggest one-week gain since late March last week.
Investors are watching to see if the Fed will cut rates if markets stay settled and upcoming economic data is upbeat, such as Friday's better-than expected reports on new home sales and durable goods orders.
"Given the sell-off, a lot of people began to speculate that the Fed may cut rates next month, although in light of the market recovery, there's a chance it may not," said Mitsuru Sahara, senior vice president of forex dealing at Mitsubishi UFJ Bank. A Fed rate cut due to the market turmoil is seen making it difficult for other central banks to justify rate rises.