The dollar held above its lowest level against the yen in nearly 13 years and a record low versus the euro this morning, but was seen susceptible to more declines on worries about the US financial system.
The dollar plunged yesterday after the Federal Reserve took the emergency step of cutting its discount rate on Sunday and opened up discount window lending to major investment banks, a tool not used since the Great Depression.
The steps, which accompanied JPMorgan Chase & Co's decision to buy stricken rival Bear Stearns at a rock-bottom price of $2 a share, was seen as highlighting the depths of the damage caused by the tumult in credit markets and sparked a dollar sell-off.
"The market is still nervous about the US financial system and is now talking about which financial firms are looking dangerous and which are not," said Shuichi Kanehira, a senior forex trader at Mizuho Corporate Bank.
"Given this uncertainty, the dollar will stay weak," he said.
The dollar fell 0.2 per cent from late US trading on Monday to around 97.20 yen It fell as low as 95.77 yen yesterday on electronic trading platform EBS, the lowest in more than 12-½ years.
The yen showed a subdued reaction to news that the Japanese government had nominated a former top finance ministry official, Koji Tanami, as its second candidate to run the Bank of Japan after Toshihiko Fukui retires tomorrow.
"The market is more focused on the US credit crunch, and I do not get the sense that traders will regard this as a factor," said a trader for a Japanese trust bank.
The name surprised market players and it was hard to say what kind of stance Tanami has on monetary policy and whether his nomination would be approved by opposition parties, they said.
The opposition have the power to veto the appointment through their control of parliament's upper house.
The euro edged up 0.3 per cent from late New York to around $1.5770 but was below a record $1.5905 struck yesterday.
Traders said the market was in a wait-and-see mode ahead of a Fed policy meeting and quarterly earnings announcements by US investment banks Goldman Sachs and Lehman Brothers later on today.