The yen declined as stocks rebounded on speculation that a sale of Citigroup Inc. will reduce risk in the financial system, stoking demand for higher-yielding assets financed with loans in Japan.
The yen also weakened against the Australian dollar, a favorite of so-called carry trades, after the Reserve Bank of Australia bought its own currency for at least the fifth time in four weeks. The dollar dropped versus the euro on speculation the Federal Reserve will cut interest rates and flood the financial system with cash as a recession causes prices to fall.
``The main driver is the rebound in equity markets that are gaining on speculation Citigroup could merge or sell off,'' said Lee Hardman, a currency strategist in London at Bank of Tokyo- Mitsubishi Ltd. ``This is taking some of the steam out of the yen's recent rally.''
The yen has gained 17 percent against the dollar this year and 35 percent versus the euro as global recession concerns spurred a reduction in so-called carry trades, where investors get funds in a country with low borrowing costs and invest in one with higher interest rates.
The Bank of Japan kept its benchmark rate at 0.3 percent today and said it will consider pumping more money into the financial system to prop up an economy that fell into a recession last quarter. Japan's rate compares with 6.5 percent in New Zealand and 5.25 percent in Australia.
``There's strong possibility that the yen will continue appreciating as the global recession may deepen,'' said Tohru Sasaki, chief currency strategist in Tokyo at JPMorgan Chase & Co. and a former chief foreign-exchange trader at the Bank of Japan. ``It's an environment where losses in cross-yen currencies are likely to be even bigger than those in the dollar-yen.''
The Fed's record injections of liquidity to stabilize the financial system have driven the overnight lending rate between banks to less than half the 1 percent target set by officials last month. The gap is shifting investor focus toward the amount of money in the system as a better gauge of Fed intentions.