The dollar rose against the yen on Tuesday, pulling up from a slide to seven-month lows the previous day, but the outlook remained clouded by worries of a China-led slowdown in global growth.

Traders said a rise in US stock index futures and a brief rebound in Japanese stocks helped spur dollar-buying against the yen earlier in the day, with the dollar rising to 120.11 yen at one point.

There was also talk of dollar-buying by Japanese players.

Fed rate hike hopes

The greenback had tumbled 4 per cent against the yen over the two previous days as the turmoil in global financial markets whittled down bets that the Federal Reserve will raise interest rates in September.

The dollar rose 0.8 per cent to 119.30 yen, after having tumbled 2.9 per cent on Monday for its biggest one-day fall in five years.

The dollar pared its gains as Japanese equities fell in the afternoon, with the benchmark Nikkei index closing sharply down by 4 percent.

While the dollar has pulled up from Monday’s trough of 116.15 yen, its lowest level since mid-January, it is still well below levels around 123 yen to 124 yen where it had been trading last Thursday.

US economy

Whether investors will continue to buy back the dollar will hinge on the US economy’s outlook, said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.

“Heightened concerns about a global slowdown have triggered the recent moves...Since there’s no change to the view that China is not doing well, the key becomes the US,’’ he said.

Shanghai shares slumped 6.1 per cent after plunging more than 8 per cent on Monday.

Market turmoil

Besides receding expectations for a Fed rate rise in September, the dollar has also come under pressure recently as market turmoil prompted the unwinding of carry trades funded in the low-yielding euro and yen.

In times of financial stress, the euro and yen are bought back as investors unwind positions in trades that entail higher risk but also higher potential return.

The euro fell 0.6 per cent to $1.1552. The single currency had set a seven-month peak of $1.1715 on Monday.

Heng Koon How, senior FX strategist for private banking and wealth management at Credit Suisse in Singapore, said Japanese and euro zone policymakers were unlikely to tolerate further sharp rises in the euro and yen as they could undermine their efforts to reflate their economies.

“I would expect verbal intervention to heat up, should euro head higher towards $1.20 or dollar/yen trades on a sustained basis below 115,’’ Heng said.

Japanese Finance Minister Taro Aso on Tuesday warned market players against pushing up the yen too much further, saying that its spike against the dollar overnight was “rough’’ and undesirable for the economy.

Against a basket of six major currencies, the dollar stood at 93.701, holding above Monday’s seven-month low of 92.621.

“There are still two-way flows, with demand for buying the dollar on dips. Some may see the beginnings of a Lehman crisis-like situation. I don’t think sentiment is that bad, but the next few days could determine how it pans out,’’ said Bart Wakabayashi, head of foreign exchange at State Street in Tokyo.

The Australian dollar rose 0.5 per cent to $0.7193, having pulled up from a six-year trough of $0.7044 plumbed on Monday.

Related Topics