Hopes had recently been raised for such an easing as part of a concerted effort by the Group of Seven (G7) industrialised nations to prevent a global recession.

Lower German interest rates would have made mark deposits less attractive to investors.

"People are selling yen against dollars and against marks. That's been the most broad G7 theme today," said John Nelson, foreign exchange manager at ABN-Amro Bank.

"European stock markets stabilised although the Dow is a little bit more under pressure than I would have expected, givenwhat we saw in Europe today."

The dollar rose to 135.32 yen from 134.47 at Monday's close and fell to 1.6825 marks from 1.6900. The Dow Jones industrial average got little benefit from overseas market rallies, reversing an early gain to end down 36.05 points at 7,897.

Germany's benchmark DAX index rose 3.19 per cent, joined by gains on other European bourses. The mark rose to a three-week high against the yen, contributing to the dollar's mixed performance, after European Central Bank president Wim Duisenberg told the European Parliament that money market rates among EMU participants would have to move down to near Germany's current 3.3 per cent.

Bank of France governor Jean-Claude Trichet reinforced the notion that short-term interest rates in the core of Europe -- Germany, France, Belgium and the Netherlands -- would stay put while the the higher rates in countries like Italy, Spain, Ireland and Portugal decline to ensure a smooth start to EMU.