Worries about the US economy resurfaced on Wednesday before key US retail sales data, prompting investors to pare recent gains in stocks and seek the relative safety of government bonds.
The low-yielding yen rose as investors took some risky bets off the table in case the US report showed more weakness in the world's biggest economy than already anticipated.
A weakening consumer sector, which accounts for more than two thirds of the US economy, has fuelled concerns that a recession is increasingly likely. "The question is how much weaker it's going to be," said Joseph Kraft, managing director of Japanese capital markets for Dresdner Kleinwort in Tokyo.
The data, due at 8:30 am EST, will set the scene for US Federal Reserve Chairman Ben Bernanke's congressional testimony on Thursday, another closely-watched event which is likely to keep investors cautious.
Tuesday's news that billionaire investor Warren Buffett had offered to reinsure $800 billion in municipal debt guaranteed by bond insurers had helped to soothe worries about further fallout from the credit crisis and sent global stocks rallying.
The FTSEurofirst 300 index of top European shares, which jumped 3.4 per cent on Tuesday, fell 1.2 per cent in early trade, with Germany's DAX and Britain's FTSE 100 both also down more than 1 per cent.
"The market really doesn't have any conviction. There is so much uncertainty out there," said Dirk Thiels, head of global equity funds at KBC Asset Management.
MSCI's main world equity index was down 0.5 per cent. Earlier, Japan's Nikkei edged up just 0.4 per cent, while MSCI's measure of other Asian stock markets .MIAPJ0000PUS slipped 0.3 per cent.
Signaling rising risk aversion, European credit spreads widened sharply, pushing the Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, up 16 basis points to 571 basis points.
With investors looking to cut back on risky bets, both the low-yielding yen and government bonds rose.
Investors tend to sell the yen in risky carry trades to fund purchases of higher yielding assets and reverse those trades when risk appetite fall.
The dollar slipped 0.1 per cent to 107.20 yen, while the euro was 0.3 per cent lower at 156.04 yen. Against the dollar, the common currency lost 0.2 per cent to $1.4556.
Persistent worries about downside surprises on the euro zone economy and the possibility of European Central Bank interest rate cuts in the next few months kept the euro pressured.
"Getting above $1.4630 would certainly be very difficult (for the euro) even if today's retail sales numbers out of the US were to surprise on the downside," said Michael Klawitter, currency strategist at Dresdner Kleinwort.
Euro zone government bond futures rose and Bunds and US Treasuries regained some poise after stumbling a day earlier. The March Bund future FGBLH8 climbed 28 ticks to 116.73 while the 2-year Bund yield edged down slightly to 3.11 per cent.
Among commodities, US crude CLc1 was little changed at $92.70 a barrel, remaining subdued after a three-session rally fizzled out on Tuesday. Copper fell around 2 per cent as Chinese buyers, returning to the market after the lunar New Year holidays, proved unwilling to push prices higher.
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