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The dollar rose on Wednesday as fragile global stock markets stabilised, taking the heat out of a rush to unwind carry trades that boosted the safe-haven yen and the low-yielding euro in recent weeks.
A spike in risk aversion due to worries about slowing Chinese and global growth prompted investors to cut unfavourable bets in the yen and the euro, both of which have been popular funding currencies for carry trades. Such trades involve selling low-yielding currencies to buy riskier, higher-yielding assets.
The dollar was up 0.6 per cent at 120.10 yen, rising from a low of 119.225 yen as European stock markets rose and US stock futures were almost 1 percent higher. The yen had jumped about 1.6 per cent on Tuesday.
With eyes also on Thursday's European Central Bank meeting, the euro fell 0.6 per cent to $1.1250, having rallied 0.9 per cent on Tuesday when it rose to $1.1332.
"There has been a moderation in risk aversion with European stocks and Wall Street stock futures in the green. That has seen the yen give up some of its recent gains," said Alvin Tan, currency strategist at Societe Generale.
"US payrolls will be the focus, but I doubt it will change the current debate over whether the Federal Reserve will hike rates in the near term or not."
A report showing weakness in US factories on Tuesday added to the gloom over the global economy, sending the S&P 500 down 2.5 per cent.
"Short-term focus will be on the U.S. ADP employment report today and the European Central Bank meeting tomorrow. There are hopes the ECB may ease (policy) further in light of recent developments, which could improve risk sentiment," said Shinichiro Kadota, chief Japan FX strategist at Barclays in Tokyo.
Markets will comb the ADP employment report as a rough predictor of the more comprehensive US non-farm payrolls due on Friday. Analysts said that only if the jobs report shows a huge jump in average earnings will investors start to price in a good chance of a Fed hike in September.
The Australian dollar earlier hit a 6-1/2 year low of $0.6892, pummelled sliding oil and commodity prices. Its decline was accelerated by weaker-than-expected domestic growth data.
It was last trading 0.15 per cent higher at $0.7032.
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