The dollar edged up after sliding close to an eight-year low against the yen on Tuesday, as Tokyo share prices gained despite a fall on Wall Street. The dollar fell to 101.42 yen in early trade, nearing an eight-year low of 101.40 yen struck on electronic trading platform EBS on Friday, but later trimmed its losses to stand at 101.75 yen, steady from late US trading on Monday.
Traders said the dollar seemed unlikely to rebound sharply against the yen, given signs of further deterioration in credit markets with more rate cuts expected by the Federal Reserve.
"There is an enormous amount of credit jitters in the market, weighing on the dollar," said a forex trader at a Japanese trust bank. Hurt by writedowns of US subprime mortgages and related securities, banks are increasingly reluctant to extend credit to investors such as hedge funds, triggering a cycle of margin calls and forcing selling across markets such as those for high-quality US mortgage bonds.
Tokyo stock market's Nikkei average rose 1 percent, having rebounded from a 2-1/2 year low hit earlier on Tuesday. Equity market moves are considered a barometer of investors' risk appetite, and gains in share prices can bolster demand for carry trades, which involve selling low-yielding currencies like the yen to buy higher-yielding currencies and assets.
The dollar kept some distance from an all-time low hit late last week. It rose against the euro on Monday after European Central Bank President Jean-Claude Trichet said it was concerned about "excessive exchange rate moves".
The euro trimmed some of the previous day's losses, rising 0.1 percent to $1.5360 It hit a record high of $1.5465 on EBS late last week after a report showing the biggest US job losses in five years reinforced expectations for further interest rate cuts by the Federal Reserve. Speculation that the Fed might lower interest rates from the current 3 percent before its scheduled meeting on March 18 has also spurred dollar selling.
US interest rate futures now fully price in a 75 basis point rate cut by the Fed this month and around a 10 percent implied chance for rates to be lowered by 100 basis points.