By David Gaffen and Wanfeng Zhou
NEW YORK (Reuters) - The yen swung wildly on Tuesday, reversing the previous day's late sell-off against the dollar and euro after an official with the Group of Seven said it is worried about excess moves in the Japanese currency.
World stock markets edged higher, led by European shares. U.S. indexes were little changed, with the S&P 500 index holding near multi-year highs ahead of President Barack Obama's State of the Union address.
The G7, in a statement, urged countries to refrain from competitive devaluations, saying it remained committed to "market-determined" exchange rates. This was in reaction to weeks of concern that the new Japanese government's monetary easing policy, which has also weakened the yen, could trigger far-reaching currency wars.
However, the market interpreted the statement as a sign that the G7 supported Japan's moves, prompting an official from a G7 nation to say later that the group "is concerned about unilateral guidance on the yen."
The comments - meant to clarify the G7 statement - sparked a rally in the yen against the dollar and euro.
"Having asserted on Sunday evening that G20 would seek to 'calm' markets over talk of currency wars, the first ad-hoc attempt to do so this morning has been a dismal failure," said Richard Gilhooly, analyst at TD Securities in New York. "Rather than calm the markets, the poorly communicated statement has significantly raised volatility and now we have to wait to see the actual outcome of G20 on the weekend."
The dollar was down 1.2 percent against the yen at 93.14, having risen to 94.42 yen on Monday, according to Reuters data, the highest since May, 2010.
The euro fell 0.9 percent to 125.30, after a 2 percent rally on Monday.
The G7 must go into this weekend's G20 meetings forcefully pressing major emerging economies to adopt flexible foreign exchange rates, Bank of Canada Governor Mark Carney said on Tuesday.
Tokyo is likely to come under serious pressure when G20 finance ministers and central bankers meet in Moscow at the end of the week, not least because the United States is employing similar policies.
Japanese Finance Minister Taro Aso welcomed the statement, saying it recognized Tokyo's policy steps were not "aimed at influencing currency markets."
U.S. Treasury official Lael Brainard said on Monday that while competitive devaluations should be avoided, Washington supported Tokyo's efforts to reinvigorate growth and end deflation.
MSCI's global share index was up 0.5 percent at 356.55. European shares gained 0.6 percent to close at 1161.46, led by UK banks after Britain's third-biggest lender, Barclays
On Wall Street, the Dow Jones industrial average gained 45.05 points, or 0.32 percent, at 14,016.29. The Standard & Poor's 500 Index was up 3.21 points, or 0.21 percent, at 1,520.22. The Nasdaq Composite Index was up 0.77 points, or 0.02 percent, at 3,192.77.
STATE OF THE UNION
The economy will be a major topic of Obama's speech before a joint session of Congress set for 9 p.m. (0200 GMT Wednesday). Investors will listen for any clues on a deal with Republicans to avert automatic spending cuts due to take effect March 1.
Benchmark 10-year Treasury notes fell 2/32 in price to yield 1.97 percent, up from 1.96 percent late on Monday, as investors prepared to absorb $72 billion in new debt supply this week.
In European bond markets, Spanish and Italian bonds inched up as domestic buyers took advantage of a recent sell-off. But the recovery looked fragile, given political uncertainty in both countries.
Spain sold 5.6 billion euros of 6- and 12-month debt, beating the top end of the target amount, but paid a higher yield on the longer-term paper as a political corruption scandal weighed on shaky confidence. Italy's debt costs also rose as it sold 8.5 billion euros of one-year paper.
The euro rose 0.4 percent to $1.3462, accelerating gains after European Central Bank President Mario Draghi said there is no such thing as a currency war and that Spain was on the right track toward economic recovery.
Brent oil rose 14 cents to $118.27 a barrel. Spot gold clawed back from its lowest in over a month and was last at $1,652 an ounce.
Financial markets showed a muted reaction to news that North Korea has conducted a nuclear test and said it would never bow to U.N. resolutions.
A nuclear test monitoring agency in Vienna said the blast was double the size of North Korea's last test in 2009. NATO condemned the move, calling it an "irresponsible act" that posed a grave threat to world peace.
(Editing by Dan Grebler)
