SINGAPORE The US dollar was steady on Wednesday, dragging the yen away from a seven-month peak, as currency markets regained a semblance of calm in a week that began with a massive shakeout in assets, driven by recession fears and unwinding of popular carry trades.

The yen was 1% lower at 146.43 per dollar in early trading, inching away from the seven month high of 141.675 it touched on Monday. It is still up 3% in August, and well above the 38-year lows of 161.96 it was languishing in just at the start of July.

The yen's fortunes have shifted since then, as bouts of well-timed interventions from Tokyo in early July and a hawkish shift from the Bank of Japan last week led investors to bail out of once-popular carry trades, in which traders borrow the yen at low rates to invest in dollar-priced assets for higher returns.

The market volatility was exacerbated by a softer-than-expected US job report on Friday, and disappointing earnings from major tech firms, sparking a global sell-off in riskier assets, as investors feared the US economy was heading for a recession.

"The yen undervaluation was a bit overstretched," said Aninda Mitra, head of Asia Macro and Investment Strategy, BNY Advisors Investment Institute. "There was an adjustment that was waiting to happen."

The swing in yen positioning seen over the last one month was among the largest on record, according to strategists at JPMorgan, with their models suggesting 65% of yen shorts have now been covered as of Aug 6.

"While there are still JPY (Japanese yen) shorts out there, positioning-induced volatility in USD/JPY may begin to edge down from here."

On Wednesday, the euro was little changed at US$1.092675 , while sterling last fetched US$1.26985 in Asian hours, not far from the five-week low it hit in the previous session.

The US dollar index, which measures the greenback against six rivals, eased to 102.94 but is up from the seven month low of 102.15 it touched on Monday.

Traders have also adjusted their expectations from the Federal Reserve this year, following the soft jobs report last week, with nearly 105 basis points of easing anticipated by year-end.

Markets are now pricing in a 70% chance of the Fed cutting rates by 50 bps in September, CME FedWatch tool showed, compared with a 85% chance a day earlier, with major brokerages also anticipating a large rate cut in the next meeting.

Some analysts though, expect the Fed to take a measured approach.

"My sense is that the Fed is doing what it does, it wants some reaffirmation of the trend from several data points ... before drawing a conclusion," said BNY's Mitra.

"Whereas the market looked at one NFP print … and jumped to the conclusion that a rate cut was needed."

A Reuters poll of foreign exchange strategists expects the US dollar to claw back some of its recent losses over the next three months, on expectations that markets have again gone too far in pricing in too many interest rate cuts this year.

In other currencies, the Australian dollar was 0.24% higher at US$0.6534, a day after the central bank ruled out the possibility of an interest rate cut this year, saying core inflation is expected to come down only slowly.

The Aussie has struggled in recent days, sinking to eight month lows on Monday, in the wake of the global markets meltdown.

The New Zealand dollar was up 0.74% at US$0.5998 following strong jobs data.

  - Reuters