Dollar Falls Against Euro, Yen Broad Drop Could End if Risk Aversion Returns, Analysts Say

The dollar retreated sharply against both the euro and the yen.

The euro was supported by some strength in stocks, while the yen was bolstered by technical factors, analysts said.

While the dollar was broadly weaker, analysts weren't convinced it was the beginning of a wholesale retreat. The dollar could resume strengthening against its rivals in coming sessions if risk aversion once again takes control of the markets, analysts said.

Foreign Exchange Data

In late-afternoon trading in New York, the euro was at $1.2848, up from $1.2675 late Tuesday, and the dollar was at 97.19 yen, down from 98.72 yen. The euro was at 124.87 yen from 125.12 yen. The pound was at $1.3869, up from $1.3747, and the dollar was at 1.1525 Swiss francs, down from 1.1618 francs.

The pound dropped to a six-week low of $1.3663 in overnight trading, ahead of the Bank of England's first foray into quantitative easing, before rebounding.

Since the start of February, the dollar has gained sharply against the yen. Analysts had said this week that a yen rebound was expected.

Jessica Hoversen, fixed-income and foreign-exchange analyst at MF Global in Chicago, said many market participants had expected the dollar to break through 100 yen, and its failure to do so prompted a retreat.

But recent weak Japanese data suggest the dollar's decline against the yen could be limited in coming sessions. "I think the fundamentals alone could support a dollar rally higher from this level," Ms. Hoversen said.

While currency-market participants have temporarily stopped reducing their long yen positions, that is likely to resume, said Francoys Levert, managing director and head of foreign-exchange sales for Canada at State Street Global Markets in Montreal. "There's a lot of bad news coming out of Japan, right now."

Other analysts suggested the dollar faces further downside against the yen. A report from CitiFX said the dollar's move below 97.90 yen could prompt a rapid move to 96.50 yen or lower. "History shows that [the dollar-yen rate] has the capability for really fast downside moves. We would not be surprised if this move takes place in the next 24 hours," the report said.

MF Global's Ms. Hoversen said the euro's gains were driven by an extension of Tuesday's rally and a correction from earlier oversold levels in the common currency. "The fundamentals clearly don't support this," she said.

There has been some decent buying of the euro in the past few sessions, but its gains could prove relatively short-lived, said State Street's Mr. Levert. "We're not convinced this is a sustainable rally in the euro. We think that U.S. dollar buying is still out there," he said

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