TOKYO/SYDNEY: The dollar slipped against the safe-haven yen on Tuesday as investor risk aversion mounted on the back of a sharp drop in equities.
The battered euro caught some relief as the dollar stumbled against the yen, helping the common currency pull back a bit from a nine-year trough. Persistent weakness in oil prices and uncertainly over the Greek political situation have spooked investors, sending Wall Street to its biggest one-day fall in about three months.
As the region's equities floundered -- Tokyo's Nikkei sank 3 percent -- the resulting flight to safety drove investors into the yen. As a result, the dollar dipped to as low as 118.65 yen from Monday's high of 120.68, moving further away from a seven-year peak of 121.86 set last month.
A sharp fall in US Treasury yields also undermined the dollar versus the yen, with 10-year yields diving 14 basis points in just two sessions.
"The dollar/yen surge late last month that ignored some weak US data was overdone, it was led by sentiment and not based on solid factors. So it's natural for players to adjust positions when faced by lower oil and tumbles in European, US and now Japanese equities," said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.
"But the key theme of monetary policy divergence remains firmly in place, and I don't see the dollar declining much more against the yen," Murata said.
The euro last traded at $1.1961, up 0.3 percent, after dipping into the $1.1860 area on Monday, reaching depths not seen since early 2006.
The euro's bounce, however, is expected to be limited as the prospect of more policy easing from the European Central Bank has grown ever stronger.
Adding pressure on the ECB to do more, German inflation slowed to its lowest in over five years in December. The data came just days after ECB President Mario Draghi said the risks were growing that inflation would stay too low for too long. Constant chatter of a Greek exit from the euro zone further sapped confidence in the currency.
"I believe EURUSD will continue to fall this month as the market moves to near 100 percent certainty of ECB QE on January 22," analysts at CitiFX wrote in a note to clients, attributing those comments to the bank's head New York spot trader.
The euro slid to a two-month low of 142.020 yen.
A slide in crude oil prices hurt commodity currencies such as the Norwegian crown, which hovered near a three-week low of 7.6764 crowns per dollar.
Buffeted by a free fall in oil prices, the Norwegian currency had slid to a 12-year low of 7.8558 crowns against the dollar in December.
Brent crude oil was stuck near a 5-1/2-year trough of $52.66 per barrel hit overnight as growth in supplies showed no signs of abating in an already saturated market. The Australian dollar, another commodity currency, got a breather after data showed Australia's trade deficit was not as big as feared.
The Aussie was up 0.8 percent at $0.8147, crawling away from a 5-1/2 year low of $0.8036 struck on Monday.
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