(Updates at 0222 GMT)

By Ankur Banerjee

SINGAPORE, Aug 7 (Reuters) - 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.