The dollar rose more than 5.2% against the Japanese currency to ¥97.654 from ¥92.772 late Monday. At one point during the session, the dollar traded as high as ¥97.78.
The euro fell to $1.2616 from Monday's close of $1.249. Earlier Tuesday, the euro fell as low as $1.2329, which was the lowest level for the 15-nation currency since April 2006.
The British pound, however, rose 1.8% to $1.5823 from $1.5552 late Monday. The pound fell Monday to its lowest level against the dollar since November 2002.
Volatile yen and sinking global marketsThe Nikkei, the Japanese stock index, roared back from a 26-year low with a 6.4% gain Tuesday, breaking the six-day cycle of sharp rises in the yen and drops in the stock market.
European stocks followed Asia's lead with Germany's DAX index gaining 11.3%. The FTSE 100 in London rose 1.92% and France's CAC-40 gained 1.5%.
Stock prices in the United States were up 6% with about 40 minutes left in the session as investors overlooked dour economic reports to focus on a potential interest rate cut by the Federal Reserve.
But Tuesday's global stock market rebound may not be enough to stop the yen's rapid ascent, according to some analysts.
"We're looking at an inevitable piece of volatility," said Neil Mellor, currency strategist at the Bank of New York Mellon. "Within any trend you get a period of movement in the opposite direction."
Furthermore, investors speculated that the Bank of Japan could begin selling yen in order to stabilize the currency markets. On Monday, the Group of Seven major industrial countries said they were concerned about the yen's recent volatility, saying it could pose a threat to the stability of the global economy.
"It's safe to say we've moved a step closer towards Japanese intervention," said Mellor. "If the momentum of the last few days continues, it will lead to lots more volatility in the yen."
The yen has skyrocketed in the past week, as recent turmoil in the world's financial markets and concerns about a global recession have driven investors away from high-yielding currencies such as the euro and the pound. As a result, lower-yielding currencies like the dollar and the yen have surged in value because they are considered by many investors to be a safe-haven.
Even with Tuesday's large rebound, the dollar has still declined 10.6% against the yen since the beginning of the month, when it traded at about ¥106.
The yen has also been supported recently by the so-called carry trade. Investors often borrow yen to fund investments in higher-yielding currencies. But when those currencies weaken, and investors reverse their positions, they are forced to buy back the yen, raising its value.
Since Japan is such a big exporter of goods, a more robust yen hurts profits for Japanese firms as sales from abroad get translated back into yen. The more that the yen has climbed, the worse Japan's stock market has performed, which has resulted in a ripple effect on European and U.S. exchanges.
Volatile dollar takes a breather
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