Yen rebounds from sharp losses, stocks eyed

TOKYO, Aug 30 (Reuters) The yen rebounded on Thursday as investors picked up the currency after a sharp drop the previous session, when recovering U.S. stocks whetted investor appetite for risky trades that involve selling the low-yielding yen.

The yen clawed back in early Asian trade after the euro posted its best one-day showing against the Japanese currency in more than three years on Wednesday, but traders said the yen may lose more if Asian stocks follow Wall Street higher.

''Financial markets remain very unstable, so a climb in stocks will result in yen selling, while weakness in equities will push the yen higher,'' said a trader at a Japanese bank.

Currencies have been jerked around by movements in global stock markets as investors scour for more signs of how turmoil in the U.S. subprime mortgage market is impacting credit markets around the world, as well as the broader U.S. economy.

Traders have been using global equities as a gauge of risk appetite, particularly as a tightening credit market has lifted volatility and dented the carry trade, in which low-yielding currencies such as the yen are used to buy assets in higher-yielding ones.

The Nikkei average rose 1.4 percent in early trade, tracking a rebound in U.S. stocks on Wednesday, when the Nasdaq Composite Index posted its best day in more than a year and major indices jumped 2 percent or more as investors picked up battered stocks.

The dollar slipped 0.35 percent to 115.70 yen pulling away from 116.26 yen touched on Wednesday, when the dollar surged nearly 2 percent, posting its biggest daily gain since before January 2005.

Tokyo traders said the dollar's climb had been capped in Asia, partly as investors such as Japanese exporters were keen to sell the U.S. currency as it climbed towards the mid-116 yen region.

The euro fell 0.45 percent to 158.20 yen after jumping as high as around 158.95 yen the previous session.

Reuters RKM VP0655