The yen fell broadly and higher-yielding currencies strengthened on Thursday as calm returned to troubled credit markets and rising equities signaled increased investor appetite for risk.
Increased confidence in global markets has brought a return to higher risk plays like the carry trade, where investors borrow the low yielding yen to buy higher yielding assets.
Equity markets have corrected in Asia and Europe, and in FX people are moving back into carry trades, said Niels Christensen, FX strategist at Nordea in Copenhagen.
At 3:56 a.m. EDT, the dollar was up 0.5 percent against the yen at 115.88 yen. The euro was also up 0.5 percent to 156.93 yen.
Uncertainty in financial markets prompted the Bank of Japan to leave interest rates unchanged at 0.5 percent on Thursday, easily the lowest in the industrialized world.
On Wednesday, the European Central Bank reminded markets of the policy stance agreed in August by its rate-setting Governing Council, a move some analysts saw as a signal it is likely to raise rates at its September 6 meeting despite market turbulence.
ECB President Jean-Claude Trichet said on August 2 that strong vigilance was needed on inflation dangers -- ECB code that a rate rise the following month was likely.
Wednesday's statement came as part of a surprise announcement that the ECB would auction 40 billion euros in three-month financing to money markets on Thursday, on top of regular funds.
COUNTRYWIDE BOOST FOR EQUITIES
European equities opened firmer, tracking gains in U.S. and Asian markets on growing hopes the worst of the recent turmoil in financial markets may have come to an end.
Shares were boosted by news that Bank of America Corp would invest $2 billion in Countrywide Financial Corp, the largest U.S. mortgage lender.
The investment came six days after Countrywide stunned investors by tapping an entire $11.5 billion credit line because it was having difficulties selling short-term debt.
But analysts said increased risk appetite may be short-lived.
There is little reason to believe financial markets are out of the woods just yet. Certainly, the flow of adverse news has not yet run dry, and indeed, far from it, said Bank of New York Mellon in a note to clients.
The euro gained support after investors interpreted the ECB's reference to its August 2 policy stance to mean the central bank had not changed its view on rates despite heavy share prices falls and tightening credit conditions.
The euro was steady against the dollar at $1.3540 at 3:56 a.m. EDT. The higher-yielding New Zealand and Australian dollars were both up more than one percent versus the yen.
BOJ Governor Toshihiko Fukui, meanwhile, signaled there was no reason the BOJ should not press ahead with its rate-raising strategy if the economy remains shielded from the current financial market turmoil.
He warned of the dangers of leaving monetary policy too loose for too long, but said the BOJ will monitor ongoing adjustments in financial markets, which may take some time to play out.