SINGAPORE/TOKYO: The dollar rose more than 1 percent against the yen on Tuesday and pulled away from seven-month lows as investor risk aversion showed signs of easing, but the outlook remained clouded by worries about slowing Chinese growth.
Traders said a rise in US stock index futures and a bounce in Tokyo equities from session lows helped spur dollar-buying against the yen. There was also talk of dollar-buying by Japanese players.
Such factors helped bolster the greenback, which had tumbled 4 percent against the yen over the two previous days as the recent turmoil in global financial markets whittled down bets that the Federal Reserve will raise interest rates in September.
The dollar rose 1.3 percent to 120.00 yen, pulling away from Monday's trough of 116.15 yen, which was the dollar's lowest level since mid-January.
The greenback, however, is still well below levels around 123 yen to 124 yen where it was trading last Thursday. 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.
In a sign of investor concerns about China's economic health, Shanghai shares fell 4.3 percent after plunging more than 8 percent on Monday.
A near-term key for the dollar is whether it can rise back above the 200-day moving average, said Murata at Brown Brothers Harriman. That resistance now lies roughly around 120.70 yen.
Besides receding expectations for a Fed rate rise in September, the dollar has also come under pressure 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 0.7 percent to $1.1537. The single currency had set a seven-month peak of $1.1715 on Monday, when it had shot up from a low of $1.1370.
"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 0.8 percent to $0.7215, having pulled up from a six-year trough of $0.7044 plumbed on Monday.
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