The yen retreated from early gains on Wednesday and higher yielding currencies recovered as rising stocks signaled a slight return to risk appetite, prompting investors to move back into the carry trade.
The yen had strengthened in early trade as falling Asian and European stocks led to renewed jitters about the state of the global economy.
This prompted investors to unwind carry trades where they borrow low yielding currencies like the yen to fund purchases of higher yielding assets.
But some Asian markets recovered in late trading, European bourses are now in positive territory and futures are pointing to a rise in U.S. shares.
This has led to a reversal of moves in foreign exchange, with the yen being sold anew and high yielding currencies like the Australian and New Zealand dollars being bought.
The move back into the carry trade has come since equity markets turned this morning, said Naeem Wahid, currency strategist at Bank of Scotland Treasury Services.
There is a slight return to risk appetite but investors are a little bit cautious ahead of the G7 meeting at the weekend.
At 1008 GMT the dollar was steady against the yen at 116.84. The euro was up 0.1 percent at $1.4176. The New Zealand and Australian dollar were flat versus the greenback, having been down around 0.5 percent in early trading.
Minutes from the Bank of England's last policy meeting showed an unexpected dissenting vote calling for a rate cut. However this had limited impact on the pound as it was counteracted by stronger-than-expected labor market data.
Investors are looking to U.S. consumer price inflation and homebuilding permits at 8:30 a.m. EDT, and the Federal Reserve's beige book snapshot of the U.S. economy at 2:00 p.m. EDT for further clues on the next move on rates from the Fed.
FOCUS ON G7
Trading is relatively subdued ahead of the Group of Seven meeting at the weekend which could yield comments from ministers on currencies.
Few analysts expect the G7 to change its official position on currencies, which is that exchange rates are best set in open competitive markets and excess FX volatility can harm growth.
(But) there remains some concern among market participants that the coming G7 meeting ... may highlight their concerns over currency markets, which was mentioned by a Japanese Ministry of Finance official yesterday. With these factors coming together, it is likely that the yen is likely to remain firm toward the G7 meeting, Citigroup currency strategists wrote in a research note on Wednesday.