The yen slumped against the dollar and euro yesterday as investors' risk appetite returned.

It traded at 119.64 against the dollar in early London trading, with some experts predicting a drop to 120 today.

Rebounding stock and credit markets yesterday led to a restoration of carry trades using the yen.

Meanwhile, the Federal Reserve's outlook on economic growth eased investors' concerns and boosted an appetite for risky investments.

Hideki Amikura of Nomura Trust and Banking told Bloomberg the Japanese currency "will steadily edge down", with today seeing it drop to 120 against the dollar and 166 a euro.

Despite the dollar's strengthening against the yen following the Federal Reserve's report, the American currency weakened against other major currencies.

According to the Associated Press, the Fed's decision to keep the base rate at 5.25 per cent - a level it has maintained for the last year - "dashed hopes for a near-term" cut in interest rates.

Commenting to AFX, Mitul Kotecha at Calyon said: "The dollar is likely to remain supported over the short-term, especially in the wake of the less dovish Fed statement, whilst pressure on interest rate markets will be retained as markets reassess easing expectations."