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The dollar was firmer on Wednesday, surging as much as 2% against the yen after Bank of Japan Deputy Governor Shinichi Uchida said the central bank won't raise interest rates when financial markets are unstable.

The yen was last down over 1.5% at 146.70 per dollar having touched session lows of 147.50 immediately following Uchida's comments, as investors were still grappling with a massive shakeout in assets at the start of the week driven by recession fears and unwinding of popular carry trades.

"As we are seeing sharp volatility in domestic and overseas financial markets, it's necessary to maintain current levels of monetary easing for the time being," Uchida said.

The yen touched a seven-month high of 141.675 per dollar on Monday, 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.

But comments from Uchida could still prop up the trade, investors say.

"Uchida has saved the carry trade - for now", said Rong Ren Goh, a portfolio manager in the fixed income team at Eastspring Investments.

"There are also other moving parts, but yes, Japan policy is one of the important moving parts of the overall risk structure in the market. The other important ones would be U.S. economic data, which in turn informs Fed policy trajectory."

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

"Perhaps what is being said this morning is part of an attempt to stabilize the market, rather than to cause more volatility," said Moh Siong Sim, currency strategist at Bank of Singapore, referring to comments from Uchida.

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

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

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

The U.S. dollar index, which measures the greenback against six rivals, rose 0.22% to 103.19 , inching further away 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 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 Aninda Mitra, head of Asia macro and investment strategy at BNY Advisors Investment Institute.

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

In other currencies, the Australian dollar was 0.38% higher at $0.65435, 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 0.84% at $0.6004 following strong jobs data.