The yen hit a 15-year high versus the dollar on Tuesday after Japan's Prime Minister Naoto Kan won a ruling party leadership vote, while concerns about a shaky recovery knocked global stocks off a 4-month peak.
The euro fell against the dollar while euro zone bond prices gained as a sharp fall in German investor morale suggested the recovery in Europe's largest economy is poised to lose momentum.
In Japan, Kan's victory over party heavyweight Ichiro Ozawa, who had made more strident calls to curb the yen's rise, raised speculation that Japanese authorities would not intervene imminently. The yen firmed to 83.07 per dollar, its strongest since mid-1995.
"The threat of intervention will hang over the market but will there be international cooperation? Probably no. So the market will continue to test Kan's resolve," said Simon Derrick, head of currency research in Bank of New York Mellon.
European shares were steady while U.S. equity futures pointed to a slightly lower opening on Wall Street on nervousness that U.S. retail sales data at 1230 GMT could give another bleak picture of the U.S. economy.
These concerns helped push the MSCI world equity index down 0.1% to 297.93. Earlier, the index had hit a four-month peak of 298.50 as stocks benefited from a wave of more optimistic sentiment generated by solid Chinese data and relief at new Basel III banking rules.
"Trading in global equity markets is dominated by short-term views. Equity strength is fraught with dangers as investors are very fearful about what is around the corner," said Maurice Pomery, managing director at consultants Strategic Alpha.
Investors' search for safe-haven assets also set gold on track for its biggest one-day rise this month, while the dollar fell below parity versus the Swiss franc for the first time since December last year.
MORE YEN GAINS?
The low-yielding yen has gained broadly as investors have retreated from riskier assets. Some traders say any dollar rebound could be limited by expectations Japanese exporters will sell more dollars before their half-year book closing on Sept. 30.
"Clearly the market viewed the (Japan party vote) result as yen positive, and the yen is likely to continue drifting higher," said Christian Lawrence, currency strategist at RBC.
The euro was down 0.3% to $1.2844, while the dollar was steady against a basket of currencies at 81.954 after earlier touching a one-month low of 81.660.
German bund futures rose 67 ticks to 130.59.
U.S. crude oil shed 38 cents to $76.80 per barrel, off an earlier one-month high above $77 pending inventory reports expected to show crude stock draws as the shutdown of the biggest Canada-U.S. pipeline enters a fifth day.
