The dollar and the yen gained in thin trade as investors reduced risk positions on Tuesday, while the Australian dollar fell ahead of a central bank decision where it is widely expected to be keep interest rates steady.
Global risk appetite has taken a beating in the past few weeks on growing worries about the health of the euro zone's banking system, a slowdown in China and risks of a double-dip recession in the United States.
The dollar index, which tracks the performance of the greenback against a basket of six major currencies, edged up 0.1 percent to 84.68 .DXY. The index's near-term support is seen at 84.132, a seven-week low hit last week.
The safe-haven yen rose broadly after Harvard University economist Kenneth Rogoff, a former International Monetary Fund chief economist and an expert on banking crisis, told Bloomberg Television that China's property market is beginning a collapse that would hit banks.
Market players were watching whether the dollar could hold above 87.00 yen as options triggers are believed to be set below that level, traders said. The greenback hit a seven-month trough of 86.96 yen last week on the back of growing worries about an economic slowdown in the United States.
Market participants have become very bearish on everything against the yen and I am not sure why they have to be so pessimistic, said a trader at a major Japanese brokerage.
Those concerns got fuel from a disappointing U.S. jobs report last week which showed the economy shed 125,000 jobs in June.
The trader said speculative trades exaggerated a fall in the cross/yen rates in subdued activity on Tuesday, as many investors were waiting for U.S. players to return from a three-day weekend.
U.S. markets were closed for the Independence day holiday on Monday.
The dollar inched down to 87.53 JPY= from around 87.75 yen in the previous day's late London trade.
In Asian trade, the euro fell as low as 109.14 yen EURJPY=, finding support at 109.13 yen, the June 30 high.
The yen was further helped by a Nikkei business daily report which said China had expanded its buying of Japanese government bonds in the first four months this year, snapping up a net 541 billion yen of mostly short-term JGBs, double a record amount logged in 2005, amid the euro zone debt crisis.
The report prompted hedge funds to sell the euro and other currencies against the yen, traders said.
Risk aversion continues to linger just below the surface and further yen outperformance remains very likely over the short-term as investors move into safe haven currencies, Matthew Strauss, senior currency strategist at RBC Capital Markets wrote.
The euro slipped 0.2 percent to $1.2514 EUR=, below a 6-week high of $1.2613 set last week.
In Asia, attention turns to the Australian dollar and the Reserve Bank of Australia's (RBA) rate decision at 0430 GMT. [AU/INT].
The RBA is widely expected to leave rates on hold at 4.50 percent for a second straight month. Investors will scrutinise the accompanying statement for the RBA's take on the financial market turmoil and the risks of a global double-dip recession.
Any added emphasis on the global troubles would reinforce expectations that rates will be on hold for months and could lead to a minor sell-off in the Aussie.
The Australian dollar was at $0.8359 AUD=D4, well off Monday's high of $0.8467. Against the Japanese currency, the Aussie slid 0.7 percent to 73.16 yen AUDJPY=R. (Additional reporting by Anirban Nag in Sydney; Editing by Edwina Gibbs)