The dollar held off a record low against the euro on Tuesday as investors looked to see whether the battered US currency could recover further along with surging Wall Street stocks before a wave of economic data.
The dollar got a lift the previous session as investors pared some of their big bets against the US currency while the Dow Jones industrial average soared to a record high close.
The yen rose as investors took profits on the overnight gains in the dollar and other high-yielding currencies like the Australian dollar. But the yen's gains will likely be short-lived as the market's risk appetite stays strong, with investors returning to carry trades in which they borrow low-yielding currencies like the yen to purchase high-yielding currencies and assets.
Rising regional stocks encouraged investors to stick to such trades, with the Nikkei share average climbing more than 1 percent to top the psychologically important 17,000 level for the first time since early August.
"The environment for investment has improved with rising stocks and subsiding concern about problems related to subprime mortgages," said Kosuke Hanao, head of forex sales at HSBC. "That means the yen could fall broadly if US stocks gain further." The euro edged down 0.1 percent from late US levels on Monday to $1.4217, not far from its all-time high of $1.4283 hit on electronic trading platform EBS on Monday.
Against the yen, the dollar dipped 0.25 percent to 115.45 yen. The euro fell 0.3 percent to 164.15 yen. While the market uses stock performance to gauge when to sell the yen in carry trades, data suggested that Japanese investors may be shying away from investing overseas. Such investments had helped to drive the yen's broad slide.
Data compiled by Lipper showed Japanese investment trusts launched in September attracted a total of 245.18 billion yen ($2.1 billion), the lowest in more than a year.
The reduction of fund outflows from households is seen reflecting investor worries over the turmoil in global credit markets. The Australian dollar dropped as investors locked in profits after it struck an 18-year high against the US dollar this week, losing nearly 1 percent to $0.8856 The Aussie fell more than 1 percent to near 102.16 yen.
The dollar index, a gauge of the greenback's value against a basket of six major currencies, edged up to 77.984 after rebounding from a lifetime low of 77.657 hit on Monday. Traders said the employment component of the US Institute for Supply Management's manufacturing index, which rose from the previous month, was positive for the dollar ahead of the US jobs report due on Friday.