Volatile stock markets, in part due to concerns about the exposure of U.S. lenders to subprime mortgages in a declining housing market, have reduced investor interest in risky assets around the world.
In addition, investors were on edge following the previous session's comments by Japanese Finance Minister Koji Omi, who warned that markets should be aware of the risks of one-way bets, an apparent reference to yen carry trades.
"The issue of U.S. subprime mortgages is flaring up again. It's not an atmosphere where people can aggressively take positions in risky assets," said a trader for a Japanese bank.
The dollar fell about 0.11 percent to 123.06 yen
The dollar, however, trimmed some losses after dipping to a session low of 122.89 yen on EBS, helped by Japanese retail investor flows, traders said.
The euro dipped around 0.20 percent to 165.44 yen
Against the dollar, the euro fell to $1.3445
The popularity of carry trades -- borrowing funds in low-yielding currencies such as the yen to buy higher-yielding assets -- has been one of the driving factors in the yen's broad slide that pushed it to a 20-year low against the New Zealand dollar and a 15-year trough against the pound late last week.
CARRY TRADE JITTERS
The struggles of two hedge funds managed by Bear Stearns Cos. Inc. have refocused attention on defaults in U.S. subprime mortgages, and on whether such problems will have an adverse impact on the broader U.S. economy and financial markets.
Such jitters have prompted investors to unwind some carry trades by buying back the low-yielding yen against higher- yielding currencies, said a trader for a major Japanese bank, adding that such position unwinding was still relatively mild.
"There have been such moves but not in any panic-like manner," the trader said, adding that such buy-backs of the yen could accelerate if U.S. stock markets slide.
Tuesday's comments by Japan's finance minister echoed remarks by officials at Group of Seven meetings in the past year referring to carry trades and suggested some concern about the pace of the yen's slide.
But traders said the Japanese Finance Ministry was unlikely to conduct any yen-buying intervention, and that unless it did so further warnings from Japanese authorities would eventually lose their effectiveness.
In addition, traders said the yen's advance was likely to be tempered by demand for dollars and other foreign currencies from Japanese retail investors seeking higher yields abroad.
"The risk aversion is fairly minor and we've seen the Japanese not pay too much attention to it," said Sean McGoldrick, head of forex trading at Morgan Stanley in Tokyo.
U.S. data due later this session includes durable goods orders data for May. The U.S. Federal Reserve is widely expected to keep interest rates steady at 5.25 percent at a two-day policy meeting that starts later on Wednesday.
source:investing.reuters.co.uk
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