LONDON: The yen fell on Tuesday as rising stock markets increased demand for riskier trades, while expectations of more easing by the European Central Bank following soft euro zone factory data pushed the euro to a one-month low against the dollar.
Asian stock markets, including China's ended higher and European shares rose, lowering demand for the safe-haven yen.
The Chinese yuan also climbed, after the central bank fixed a higher mid-point for the onshore currency, calming nerves in the foreign exchange market and bolstering overall risk appetite - even though China suffered a seventh straight month of decline in manufacturing.
The dollar was up 0.5 percent against the yen at 113.14 and the euro was 0.4 percent higher at 123 yen, recovering from a low of 122.085 struck earlier in the Asian session, its lowest level since April 2013.
"The disappointing data from China is keeping alive hopes of more stimulus, and that is helping overall risk sentiment and putting the yen under pressure," said Yujiro Goto, currency strategist at Nomura, London. On Monday, the People's Bank of China announced a cut in the amount of cash that banks must hold as reserves - the reserve ratio requirement - by 50 basis points.
That frees an estimated $100 billion in cash for fresh lending, and some analysts now expect fiscal stimulus from Beijing to shore up the economy.
In February, the yen saw its best month since late 2008, buoyed by volatile stock markets, slowing growth in China and a view among global investors that major central banks are running out of ideas to spur growth and boost inflation.
The euro stayed under pressure against the dollar and the pound after data showed that euro zone manufacturing activity expanded at its slowest pace for a year, making a gloomy reading for ECB policymakers.
It had fallen on Monday after a report showed euro zone inflation was weaker than expected in February. The euro was 0.1 percent lower at $1.0857, its lowest in a month.
The euro has been losing ground since peaking at $1.1377 on Feb. 11, as investors bet on ECB action at its March 10 policy review.
Still, the drop has not been as sharp as in the run up to the December meeting, when the ECB's easing measures disappointed investors and led to a sharp rebound in the euro. "While the downside risks to a further drop in the euro are building, the pace will be slow.
That is because investors are worried that the ECB could disappoint, just like they did in December," said a spot trader. In the options market, the short-dated risk reversals - a gauge of demand for options on a currency rising or falling - show a bias for euro strength in the coming week.
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