LONDON: A moderately risk-averse tone dominated currency markets on Wednesday, with the safe-haven yen broadly higher amid anxiety about a slowdown in China.
The low-yielding euro, which tends to do well during times of financial market uncertainty, however, underperformed and was weaker before a European Central Bank meeting on Thursday.
The ECB is expected to take rates deeper into negative territory and announce more asset purchases in a bid to boost inflation.
The dollar was 0.2 percent lower against the yen at 112.44 yen, having slid 0.7 percent on Tuesday.
The euro, too, was 0.5 percent lower at 123.55 yen and 0.3 percent lower against the dollar at $1.0975.
The yen has been a winner so far this week after China's exports tumbled by the most in more than six years last month. The soft China data highlighted risks facing the global economy, bolstering expectations for dovish outcomes at central bank policy reviews in Europe, Canada and New Zealand.
"The poor Chinese data is fuelling risk aversion, but that is slowly giving way to some positioning adjustment before the ECB meeting," said Niels Christensen, FX strategist at Nordea.
"Given expectations are so high that the ECB will ease policy, there is a chance that it could fall short and we could see a bounce in the euro."
Those positioning for more losses in the euro are wary about placing significant bets against it, after being burned in December when the ECB eased policy less than expected. The euro rose 4 percent against the dollar on Dec. 3 when the ECB action fell short of market expectations.
This time, many investors are betting the ECB will lower the deposit rate by 10 basis points to -0.40 percent, extend asset purchases and possibly introduce tiered interest rates, like the Bank of Japan.
"The focal point is how long the market will attempt to price in the risk of the ECB meeting ending in disappointment.
The euro could rise towards the $1.11 handle if attempts to pre-empt such risk continue," said Masafumi Yamamoto, chief FX strategist at Mizuho Securities in Tokyo. Also on the defensive, the New Zealand dollar traded at $0.6744, retreating from Friday's peak of $0.6820.
While markets imply a small chance of a rate cut by the Reserve Bank of New Zealand on Thursday, investors suspect it is only a matter of time before it delivers another cut to the 2.5 percent cash rate. In contrast, the Bank of Canada is expected to keep rates on hold on Wednesday.
But a retreat in oil prices took a toll on the Canadian dollar, which eased to C$1.3416 per USD, from a 3-1/2 month peak of C$1.3262 set on Monday.
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