The yen rebounded off five-month lows versus the dollar on Wednesday, drawing support from this weekend's Group of Seven (G7) meeting, but renewed focus on carry trades could pose some risks to the Japanese currency.
A resurgence in carry trades - borrowing low-yielding currencies to invest in higher-yield assets overseas - has already hit fellow low-yielder the Swiss franc, pushing it to 6-1/2 year troughs versus the euro.
The yen has fared better due to expectations it will be discussed at this weekend's G7 finance ministers' meeting. Speculation over what the G7 may say about Asian currencies has helped to counteract recent weak Japanese data and the currency's popularity as a funding unit for investments.
"There is a bit of recovery in the yen today but that's in response to the sharp moves yesterday and overall, the risks to the yen are to the downside," said Teis Knuthsen, head of currency and fixed income at Danske Markets in Copenhagen.
Knuthsen said markets were uneasy about shorting the yen before the G7 meet but support may dissipate after the weekend. Recent weak economic data suggested the Bank of Japan will not be in a hurry to raise rates this year, he added.
Japanese interest rates are a meagre 0.25 percent and are expected to rise only gradually while eurozone and UK rates are seen increasing further this year. US rates could also still rise further after two years of policy tightening.
By 1145 GMT, the yen had risen from Tuesday's five-month low of 118.14 per dollar to trade at 117.64. It firmed about a third of a percent versus the euro to 149.19 yen.
The yen also received a boost after a senior Chinese parliament official said rapid growth in the country's foreign exchange reserves was putting heavy pressure on the adjustment of the yuan exchange rate. He added that 2008 could be an appropriate time to make the yuan convertible.
While the yen ticked higher after the comments by Cheng Siwei, analysts saw the comments merely as part of Beijing's ongoing gradual steps towards currency flexibility. Euro/dollar moved sideways to trade flat at $1.2681.
The Swiss franc hit a 6-1/2 year low of 1.5911 francs per euro, before paring losses to trade around 1.5882 francs. The Swissie also hit a two-month low versus the dollar at 1.2549 francs.
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