Investing.com – The U.S. dollar rose modestly on Wednesday while the Japanese yen fell as the Bank of Japan tried to tranquil sentiment by signaling no further interest rate hikes amid continued market volatility.

At 04:25 ET (09:25 GMT), the dollar index, which tracks the U.S. currency against a basket of six other currencies, was up 0.3% at 103.037, down further from Monday’s seven-month low.

The dollar is recovering after substantial losses

The dollar rose slightly on Wednesday, partly on a weakening yen and some bets that U.S. economic growth would not deteriorate as drastically as markets feared.

Fears of a US recession after a series of faint labour market data hit the dollar tough, which increased concerns about the need to cut interest rates more than initially expected.

However, the CME FedWatch tool showed that investors were adjusting their expectations for a Fed rate cut as the week progressed, with markets now pricing in a 70% probability of a 50 basis point Fed rate cut in September, up from an 85% probability a day earlier.

“Market tensions are noticeably higher than they were a week ago,” Goldman Sachs analysts wrote in a note, but “our FSI [Financial Stress Index] suggests that there have been no major market disruptions to date that would have forced policymakers to intervene.”

Euro and British Pound in Narrow Ranges

In Europe, it fell 0.1% to 1.0918, retreating further from Monday’s seven-month high of 1.1009, while the dollar rose.

rose 0.2% to 1.2708, still just off a five-week low set in the previous session.

Data released on Wednesday morning showed the UK economy will see stronger growth in 2022 than previously thought.

The Office for National Statistics said on Wednesday that the UK economy is now expected to grow by 4.8% in 2022, down from the previous estimate of 4.3%.

Yen falls sharply after downplaying interest rate hike prospects

In Asia, the yen rose 2.2% to 147.47, having fallen sharply after Bank of Japan officials downplayed expectations for a rate hike.

Bank of Japan (BOJ) Vice Governor Shinichi Uchida said the bank would not raise interest rates when markets were unstable, comments that came after the Japanese currency rallied wildly.

Still, the yen remained well above its 38-year low reached earlier this year and is expected to appreciate as the Japanese economy improves on higher wage growth.

rose 0.4% to 7.1862, with the yuan extending modest declines on mixed trade data.

The Chinese market contracted much more than expected in July, dragged down by disappointment over the European Union’s imposition of high import tariffs on Chinese electric vehicles in early July.

However, Chinese demand exceeded expectations, which contributed to an boost in the number of customers expecting a recovery in local demand.

Attention now turns to data from China due out later this week.