The yen hovered near a seven-week low against the dollar on Wednesday as signs of a recovery in risk appetite were seen supporting demand for carry trades. Activity remained light after US and European markets were closed on Tuesday for Christmas and as many markets in Europe will to remain closed on Wednesday.
The yen fell to a seven-week low against the dollar on Monday after US equities rallied on Merrill Lynch's announcement that it would shore up its capital through steps such as selling up to $6.2 billion in shares to Singapore's Temasek and asset manager Davis Selected Advisers. Traders said the yen could edge back towards such troughs if global stock markets extend their rise this week ahead of the New Year.
The Japanese currency was on the back foot as few players found reasons to buy the currency after the Bank of Japan downgraded its view on the country's economy last week and reinforced expectations that the central bank is in no hurry to raise rates.
"The yen could continue to slide after news of fund injections to financial institutions alleviated fears of further fallout from the credit crisis," said a senior trader at a Japanese bank. "But this optimism will be tested next week when we see US jobs data and how credit market turmoil is affecting the economy."
The dollar stood at 114.15 yen, staying near Monday's peak of 114.49 yen on electronic trading platform EBS, the highest since November 7. The liquidity injection measures by the central banks helped to avert a credit crisis and put the market at ease, but their impact may be only temporary, analysts said.
The senior trader said many market players expect the dollar's broad slide will resume soon as worries about credit market problems and an economic slowdown are likely to revive in the New Year.
Dollar/yen may trade in a range between 112.50 yen and 115.50 yen until the market finds clear idea about the health of the US economy, he said. The euro stood at around $1.4410, having come off a two-month low of $1.4310 hit on EBS last week. In the stock market, Japan's benchmark Nikkei share average rose 0.6 percent after gaining 1.9 percent on Tuesday.