London - The dollar fell towards a seven-month low against the yen but world stocks recovered earlier losses on Thursday after Federal Reserve chairperson Ben Bernanke painted a gloomy outlook for the US economy.
Bernanke said the Fed stood ready to ease monetary policy further if the budding US economy recovery withers, describing the outlook as "unusually uncertain".
The publication of European bank stress tests, due on Friday, also kept investors cautious. Europe is testing how 91 banks would cope with another economic slump and losses on government debt in the wake of the eurozone sovereign debt crisis.
"The yen is gaining after Bernanke on risk aversion and as an interest rate play in reaction to US yields falling further and rate differentials moving in favour of the yen," said Niels Christensen, currency strategist at Nordea in Copenhagen.
The dollar fell 0.4%t to
¥86.59, close to last week's seven-month low of ¥86.25. The dollar was down 0.4% against a basket of major currencies.
Two-year US Treasury yields briefly matched a record low of 0.556% hit the previous day, while the benchmark 10-year yield held near a 15-month low of 2.855%.
The MSCI world equity index and the Thomson Reuters global stock index were virtually unchanged on the day. The FTSEurofirst 300 index ticked slightly higher.
Japan's Nikkei index had earlier closed down 0.6% at its lowest close since July 2.
Uncertainty over the detail of the bank stress tests persists. Major listed banks, which face constant investor scrutiny, are expected to pass the tests, but the results may show the worst problems lie with smaller players such as Spanish cajas and German landesbanks, which are mainly unlisted.
"No one is wanting to put on any big positions ahead of the outcome of the bank stress tests tomorrow," said Justin Urquhart-Stewart, investment director at Seven Investment Management.
Emerging stocks fell 0.3% on the day.
US crude oil rose a quarter percent to $76.75 a barrel, supported by forecasts for a fourth consecutive weekly drop in US crude inventories.
The bund futures rose 30 ticks.
The euro rose 0.3% to $1.2794 after better-than-expected German purchasing managers' surveys on manufacturing and services.