* Dollar/yen hits 1-mth low before bouncing on bargain-hunting
* Germany’s ZEW index in focus amid global growth worries
* Aussie gains as iron ore prices stabilise tentatively (Adds details, quotes)
By Shinichi Saoshiro
TOKYO, Oct 14 (Reuters) – The dollar rebounded modestly against the yen and euro on Tuesday following steep falls overnight, although risk aversion amid the fall in global equities and uncertainty on the timing of Federal Reserve interest rate hikes put a firm cap on the currency.
The dollar crawled up 0.4 percent to 107.235, but remained in close range of a one-month low of 106.76 hit earlier in the session.
The euro slipped 0.2 percent to $1.2726 after surging nearly one percent overnight.
The greenback suffered a heavy blow overnight against the safe-haven yen as Wall Street took large hits, with the S&P 500 sliding to a five-month low.
“There is some bargain hunting for the dollar but it looks poised to test further lows against the yen for the time being. With U.S. stocks falling this much, risk-off bids for the yen stand out,” said Shinichiro Kadota, chief Japan FX strategist at Barclays Bank in Tokyo.
The dollar also attracted demand when global growth concerns began to sour a while back, but sliding U.S. equities have accentuated the ‘risk-off’ bids for the yen, Kadota said.
The Tokyo financial markets tried to take stock of recent developments after the Japanese markets were closed on Monday for a public holiday.
Weak signals from Germany, the euro zone’s largest economy, and signs of uneven growth in China have contributed to recent global growth concerns.
Global equities slid in the face of these concerns, with the widening Ebola epidemic further undermining risk sentiment.
Federal Reserve officials warned at the weekend that if the global recovery stumbled, it could delay an increase in U.S. interest rates.
Expected divergence between U.S. monetary policy and those of the euro zone and Japan was a key ingredient fuelling the dollar’s surge to a two-year high versus the euro and six-year peak against the yen at the start of the month.
With Germany’s economic outlook and its potential impact on the Fed’s views on the global economy in recent focus, the currency market will scrutinise Germany’s ZEW sentiment index and euro zone industrial output due later in the session.
Market watchers said the indicators could hurt both dollar and the euro, which had pulled away from a two-year low of $1.2500 hit early this month at the expense of a flagging dollar.
“Deteriorating economic conditions are to be expected, but worse-than-forecast numbers will weaken the euro and also exacerbate the dollar/yen fall by taking equities and U.S. yields lower,” said Masafumi Yamamoto, market strategist for Praevidentia Strategy in Tokyo.
The Australian dollar gained 0.4 percent to $0.8807 on a tentative stabilisation in the price of iron ore, the country’s biggest export earner.
The Aussie had neared a four-year low of $0.8642 on Monday as a spike in volatility caused by the selloff in global equities encouraged investors to unwind popular carry trades.
Highlighting the defensive position the U.S. currency was still stuck in, the dollar index was down 0.3 percent at 85.309, well below the four-year high of 86.746 struck earlier this month when a Fed rate hike in the near term seemed more likely. (Editing by Eric Meijer)