The yen rebounded from a seven-week low against the dollar on Tuesday as investors trimmed positions in a holiday-thinned market. The Australian and New Zealand dollars were targets of profit-taking and eased against the yen after a rally in US equities on Monday boosted investors' risk appetite and helped the high-yielding currencies gain overnight.
Activity was light with many other regional markets as well as European and US markets closed for Christmas holidays. "Japanese exporters sold the dollar earlier in the session and pushed dollar/yen lower," said a trader at a Japanese trust bank.
"But the price action is likely to slow further later as we expect fewer and fewer participants in the market." The dollar was down 0.3 percent at 114.00 yen stepping back from 114.49 hit on Monday on electronic trading platform EBS, its highest since November 7.
For those looking beyond Christmas, guarded optimism seemed to be the prevailing mood, with global stock market gains prompting investors to move back slowly into carry trades, in which the cheaply borrowed yen is used to buy high-yield assets.
Tokyo's Nikkei share average rose 1.8 percent by midday, tracking rallies in overseas markets during Japan's three-day weekend. All Japanese financial markets were closed on Monday for a public holiday.
Investors also welcomed brokerage Merrill Lynch's announcement on Monday that it will receive a capital infusion of up to $6.2 billion in a private placement with Singapore state investor Temasek Holdings and Davis Selected Advisors, a US-based asset manager. The euro was down 0.3 percent against the yen at 164.05 yen dragged down by the fall in the dollar against the yen, but steadied against the dollar at $1.4395.
The Australian dollar fell 0.4 percent against the yen to 99.15 yen while the New Zealand dollar fell 0.5 percent to 87.15 yen. Sterling was under pressure at 72.85 pence near a record low against the euro hit on Monday after weak British housing data reinforced expectations for more interest rate cuts by the Bank of England in 2008, possibly as soon as January.