The yen retreated against other major currencies on Tuesday after Australia's central bank stunned markets by slashing interest rates a full percentage point, stoking expectations that other top central banks could follow suit. The Reserve Bank of Australia chopped rates to 6 percent, a move that improved investor appetite for risk and boosted stocks, higher-yielding currencies and commodities.
The yen also edged off a three-year high against the euro and a five-year peak versus the Australian dollar as some investors booked profits, believing the panic selling of those currencies the previous day had gone too far. Worries that the financial crisis is spreading from the United States to the rest of the world and pushing the global economy into a recession sparked a sharp stock sell-off on Monday as investors rushed to safe havens such as gold, government bonds and the yen.
The dollar posted its biggest one-day slide since the massive 1998 unwind of carry trades. The high-yielding Aussie, long a favourite in the carry trade, collapsed nearly 11 percent - the biggest drop since the Aussie was allowed to trade freely in 1983.
But on Tuesday, market players hesitated to chase the yen further, thinking global financial authorities are likely to take more measures to help restore confidence in the worst financial crisis since the Great Depression of the 1930s.
The dollar climbed 0.9 percent from late US trade to 102.71 yen moving away from a six-month low of 100.22 yen hit on trading platform EBS the previous day. The euro gained 0.7 percent to $1.3581 up from a 13-month trough of $1.3444 on EBS on Monday after tumbling the previous day on the decision by leaders of Europe's four biggest economies against a co-ordinated bailout plan.
The single currency jumped 2 percent to 139.58 yen rebounding from a three-year low of 135.05 hit on Monday. The dollar has been boosted as well by the freeze in money markets that has forced banks to buy much-needed dollars to settle deals on the open market, hitting a 13-month high against a basket of currencies.