LONDON: The dollar rebounded above 100 yen on Tuesday from a sharp sell-off as equities rebounded while the yen was hurt by a report that Japanese pension funds could increase overseas holdings.
Sources told Reuters the government would urge public pension funds - a pool of more than $2 trillion - to increase investments in equities and overseas assets.
The dollar was last up 0.9 percent at 100.38 yen, recovering after a survey on Monday showed US factory activity fell in May to its lowest since June 2009 sent the US currency tumbling to a four-week low of 98.86 yen.
The ISM survey dimmed prospects of the Fed scaling back monetary easing soon, even though two Fed policymakers said on Monday the central bank could taper its stimulus in the coming months if data improved.
With the Fed pledging to maintain stimulus until the labour market improves, jobs numbers due on Friday will be under intense scrutiny.
"The market is very nervous at the moment because everyone is trying to get their heads around when the Fed will reduce QE," said Niels Christensen, currency strategist at Nordea in Copenhagen.
He said the comments on Japan's pension fund helped the dollar against the yen but added "more positive dollar news" would be needed to push it significantly higher.
The dollar was also lifted by a 2 percent rise in the Nikkei stock index, its biggest one-day rise in three weeks. European shares were up 0.4 percent.
Analysts said further dollar weakness was possible as investors took profit on hefty bets it would strengthen. But the trend for dollar gains and yen weakness was expected to hold.
The dollar index was up 0.2 percent at 82.801 after sliding as much as 1 percent to 82.428 on Monday.
"I think a lot of people were waiting to buy on the dip, around the 99.5 level," said Kyosuke Suzuki, director of FX at Societe Generale in Tokyo. "But there's still downside risk for the dollar-yen, with the Nikkei still in a correction phase."
The euro was steady at $1.3075, off a peak of $1.3108 reached on Monday, its highest since May 9. Resistance was seen at $1.3141, the 76.4 percent retracement of its May 1-17 fall.
The Australian dollar was down 1 percent at $0.9675 after the Reserve Bank of Australia held rates at 2.75 percent and governor Glenn Stevens said easing was still on the table. .
The dollar's retreat helped the Aussie rally near 2 percent on Monday, its biggest one-day rise in about a year.
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