The dollar rose against the yen on Wednesday, rebounding from earlier three-month lows in choppy trading, as the U.S. stock market steadied after its recent heavy losses.

U.S. equities were volatile but were higher in mid-morning trading. For the past several sessions, equities and carry trade currency pairs such as euro/yen and dollar/yen have risen and fallen together due to the perception of relatively high risk that each investment holds.

In carry trades, investors borrow in a low-yielding currency to invest in higher-yielding assets.

We're seeing an initial short-covering in short dollar/yen positions after sharp moves earlier. The focus is still on equities, said David Watt, senior currency strategist at RBC Capital Markets in Toronto.

People are thinking that equities won't be as harrowing as yesterday. But the risks are still there and they have become more global so I'm not convinced that we have seen a stable return to carry, he added.

In New York trade, the dollar reversed losses to stand 0.3 percent higher on the day at 118.73 yen, around a yen above earlier three-month lows of about 117.60, according to electronic trading platform EBS. The euro was buying 162.63 yen, also off three-month troughs around 160.47.

Markets showed little reaction to data from the Institute for Supply Management which showed a key manufacturing index was lower than expected.


The yen gained sharply earlier amid news a U.S. mortgage lender and two Australian funds were the latest casualties in the currency global credit crisis.

The fall in U.S. shares on Tuesday, after mortgage lender American Home Mortgage Investment Corp. (AHM.N: Quote, Profile, Research) said it could not fund home loans and might have to liquidate assets, battered European equities on Wednesday.

In addition Bear Stearns, which recently suffered the collapse of two hedge funds, said it had halted redemptions in a third after investors wanted to pull out their money.

Also, shares of Australia's Macquarie Bank fell more than 10 percent after it warned investors of losses in two bond funds after the credit market troubles in July.

These events, along with a spike in credit spreads, prompted currency traders to cut exposure to riskier assets by buying back the low-yielding yen and selling higher-yielding currencies like the Australian and New Zealand dollars.

The Australian dollar fell 0.4 percent to 101.17 yen, recovering from a two-month low of 99.52 yen. Sterling and the New Zealand dollar also recovered from earlier two-month lows versus the yen.

The dollar slid against the euro, however, after a report earlier showing the U.S. economy added just 48,000 private sector jobs in July, way below the median forecast of 100,000.

The report put out by ADP Employer Services suggested that Friday's closely watched Labor Department payrolls data may come in lower than expectations. Markets are forecasting U.S. non-farm payrolls jobs of 130,000, according to a Reuters poll.

The Street may reduce its forecast for NFP (non-farm payrolls) as a result of the lower ADP, but the data is always subject to being discounted, so it should not be a major data mover on the day, especially with eyes on equity and other markets, said Brian Dolan, director of currency research at in Bedminster, New Jersey.

The euro was up 0.2 percent against the dollar at $1.3697.