The yen edged up against the dollar and the euro on Wednesday but struggled to gain further despite a steep sell-off in equity markets that hurt risk appetite and reduced demand for carry trades. Traders said fears that a US recession could drag other economies down had already given a boost to bets on a broad yen broad rise, giving little room for further gains.
The euro was steady after tumbling the previous day on weak euro-zone service sector data that fanned expectations the European Central Bank will cut interest rates later this year. "Stock markets are still a strong factor to decide the yen's direction, but there are not many yen selling positions out there to be cut any more," said a senior trader at Japanese bank.
"Positions to buy the yen are bigger now, and that in turn is limiting the yen's gain." The dollar edged down 0.2 percent against the yen to 106.55 yen. The US currency fell against the yen on Tuesday after a dismal showing in the Institute for Supply Management's non-manufacturing index drove Wall Street stocks sharply lower.
The index plunged in January to levels not seen since the 2001 recession, reinforcing fears the economy is slowing even as the Federal Reserve has slashed benchmark rates by a total of 225 basis points in a bid to revive growth.
Tokyo's Nikkei share average plummeted 4.7 percent and Hong Kong's stock index tumbled 5.4 percent in a half-day trading session ahead of the Lunar New Year break. Still, the yen is likely to resume its rally if stocks in Europe track New York and Asian markets lower later in the session, traders said.
In carry trades, investors borrow the low-yielding Japanese currency to fund investments in assets with higher yields elsewhere. Such leveraged trades are vulnerable when stock markets fall and price volatility rises.
The euro was little changed at $1.4640, after dipping to the day's low around $1.4625 earlier and pulling further away from its record high of $1.4968 reached in November. The euro slid 1.3 percent against the dollar on Tuesday, its steepest one-day loss since mid-December, after service sector growth in the euro zone slowed in January to its most sluggish in 4-1/2 years.
Futures markets expect the ECB to cut interest rates by 50 basis points by the third quarter and are split on a further quarter-percentage-point easing before the end of the year. The euro was down 0.3 percent at 155.95 yen. Sterling was steady at $1.9650.