* Yen gains on profit-taking after euro, dollar rallies
* Dollar reverses early losses to rise vs euro
* Euro supported by higher money market rates
By Laurence Fletcher
LONDON, Dec 11 (Reuters) - The yen rose for a second day on Wednesday as global stock markets fell and as investors locked in profits from the dollar and euro’s strong rallies this year against the Japanese currency.
The euro fell marginally against the dollar, after its recent gains driven by tighter liquidity conditions and banks’ moves to shore up their capital positions.
The dollar was 0.3 percent lower against the yen at 102.54 yen, while the euro was 0.4 percent down at 140.98 yen .
Asian stock markets led global shares lower on Wednesday, as investors booked profits on a range of once-crowded positions. The Nikkei and the yen tend to move in opposite directions, with a rally in the share index a signal for speculators to sell the yen. A lower currency then promises to boost Japanese exports, which helps shares.
Both the euro and the dollar have rallied strongly against the yen this year thanks to the Bank of Japan’s ultra-loose monetary policy and expectations that it will provide even more stimulus next year.
“It’s a bit of profit-taking from high levels,” said Peter Kinsella, currency strategist at Commerzbank.
Analysts at Morgan Stanley said they remain bullish on dollar/yen over the longer-term but added: “We ... note that the current uptrend is showing some signs of exhaustion, suggesting that it would not take too big a shock to trigger a correction of the strong gains seen over the past year.”
The euro was 0.1 percent down against the dollar at $1.3747, not far from the six-week high of $1.3795 it hit on Tuesday.
It failed to take heart from news that euro zone countries were edging towards a deal on how to handle ailing banks. Divisions remain over key parts of the reform, which is needed to underpin confidence in the bloc’s lenders.
The euro has gained recently thanks to tighter money market conditions in the euro zone. The rise of two-year swap rates partly due to year-end factors and the ECB’s unwillingness to ease monetary policy soon to fight disinflation have seen rate differentials more in favour of the euro.
And liquidity conditions in the euro zone money market usually tighten towards the end of the year as banks refrain from lending to each other. This year another factor driving euro strength is European banks repatriating funds to shore up their capital bases ahead of an ECB asset quality review.
The dollar index, which measures its value against a basket of six major currencies, was up 0.1 percent at 80.006, just off its six-week low of 79.843 hit on Tuesday.
It showed little reaction to news that budget negotiators in the U.S. Congress have reached a two-year agreement aimed at avoiding a government shutdown on Jan. 15.
Trading volumes of most currency pairs were well below the average over the past month, according to data from the Reuters dealing platform.
Commerzbank’s Kinsella added: “There are very, very low levels going into year-end, which may be exaggerating moves somewhat.”