The yen rose broadly and high yielders dipped on Wednesday as falling global equities, rising volatility and concerns about the US subprime mortgage sector made investors more wary of risky carry trades.
The yen also benefited from comments by Japanese Finance Minister Koji Omi earlier in the week, who warned that markets should be aware of the risk of one-way bets against the yen, adding that he is watching currencies carefully.
Officials from New Zealand and South Korea have also voiced concerns over yen weakness. Risk appetite for carry trades has also been quelled by falling stock markets and concerns that trouble in the US subprime sector - highlighted by the struggles of two hedge funds managed by Bear Stearns - could spill over into the wider economy.
"It's a continuation of what we've seen over the last couple of days. We had comments from Omi ... Risk appetite is lower as well ... All these different factors have helped the yen recover, but we still see this as a corrective move and not as a real, sustained unwinding of carry trades," said Antje Praefcke, currency strategist at Commerzbank in Frankfurt.
The VIX index, which tracks equity market volatility, rose to 18.89 on Tuesday - its highest level since mid-March. European stocks fell around 0.4 percent, following lower closes on Wall Street and in Asia.
By 1105 GMT, the euro was down 0.7 percent at 164.63 yen, more than two yen below last week's record highs. The dollar was down 0.6 percent at 122.46 yen. Analysts said the yen's strength was bolstered by news that Naoyuki Shinohara, head of the Japanese finance ministry's international bureau, is set to replace Hiroshi Watanabe as finance vice-minister for international affairs.
"Markets think that it might herald a more proactive approach with Japan more actively trying to strengthen the yen," said Kamal Sharma, currency strategist at Bank of America. Eurogroup Chairman Jean-Claude Juncker said on Wednesday that "there have been a number of trends (on FX markets) which we don't feel we have completely under control".
Some European policymakers have complained about the yen's weakness versus the euro, as it makes it harder for eurozone firms to compete on price. The high yielding currencies fell broadly, with the New Zealand dollar dropping 0.6 percent to US $0.7611 while the Australian dollar slipped 0.5 percent to US $0.8413.
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