TOKYO: The euro rebounded in Asian trade on Tuesday after plunging to multi-month lows on fears that a 10-billion-euro bailout deal for Cyprus could become the standard for future rescue packages.
There are also growing worries that Cyprus still faces possible panic when banks reopen, with lenders in other weak eurozone economies facing a similarly dire scenario.
Nicosia reversed a decision to reopen some banks on Tuesday after world markets took fright at the implications of the island's bailout, which calls for an unpopular levy on bank deposits.
The euro's initial gains in Asia on Monday after the deal was announced were later erased when Eurogroup head Jeroen Dijsselbloem said the Cyprus model of penalising bondholders, shareholders and uninsured deposit holders in bank failures could be applied elsewhere on the troubled continent.
"One small step forward, two (larger) steps back. That is how markets (FX in particular) have interpreted the 11th hour deal to save the Cypriot banking system from collapse and secure Cyprus' continued presence inside the eurozone," National Australia Bank said in a note.
Dijsselbloem's comments "greatly exacerbated the risk of deposit flight", it added.
However, the embattled euro bought $1.2867 and 121.42 yen in morning Tokyo trade, strengthening from $1.2853 and 120.96 yen late Monday in New York, at well up from the $1.2830 it hit in London, its lowest level since November.
The dollar strengthened to 94.36 yen in Tokyo from 94.10 yen, as investors look to a Bank of Japan meeting next week.
It will be the first policy meeting for a new management team at Japan's central bank, which has pledged to tackle the country's long-running deflation with aggressive monetary easing.
But Finance Minister Taro Aso on Tuesday acknowledged that monetary policy alone would not reverse years of falling prices in Japan, which have crimped private spending and corporate investment.
In January the BoJ announced an unlimited easing programme and set a two-percent inflation target, seen as more explicit than a previous "goal".
"I don't think (the target) can be achieved easily and I certainly don't think the Bank of Japan can achieve the goal by itself," Aso told a press briefing according to Dow Jones Newswires.
The yen's decline came as US Federal Reserve Chairman Ben Bernanke on Monday rejected worries that the world's troubled large economies were cutting their currency values and hurting smaller, healthier nations in the process.
Tokyo has faced criticism, particularly in Europe, that is is using monetary policy to push down the value of the yen to help Japanese exporters.
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