The yen rose broadly, pushing down the dollar to 79.75 yen -- its lowest since May 5 -- after a series of stop-loss orders were triggered as the US currency failed to hold support around the 80 yen level.
US Federal Reserve Chairman Ben Bernanke on Tuesday acknowledged the US economy has slowed, fuelling more speculation that rates will stay chained near zero. His comments followed a run of dismal data on US jobs and manufacturing last week.
But he made no reference to the possibility of injecting fresh monetary stimulus into the economy through another round of quantitative easing, dubbed QE3, which would be likely to weaken the dollar.
"Bernanke's speech said there would be no change in monetary policy and there was no specific endorsement of QE3, which some people in the market were probably positioned for," said Christian Lawrence, fixed income and currency strategist at RBC Capital Markets.
"We are seeing something of a bid for safe haven assets, in line with a bid for the dollar, yen and Swiss franc. Commodity currencies are the main sufferers."
The Japanese yen and Swiss franc are usually preferred by investors when worries about global growth emerge. These investors unwind leveraged positions in high-yielding currencies and riskier assets which are usually funded in the yen, Swiss franc and the US dollar.
The high-yielding Australian dollar was down 0.8 percent at $1.10631, while the greenback was up 0.6 percent against the Canadian dollar at C$0.9795.
Safe haven bids supported the yen, with dollar/yen holding below the key psychological level of 80 yen at 79.83 yen in European trade. The dollar inched back from lows as traders cited demand from Japanese corporate and retail names.
Major stop-loss sell orders were seen below 79.50 yen, close to a low of 79.57 yen reached on May 5.
Market players are now looking ahead to the publication of the Fed's Beige Book at 2030 GMT for more evidence on the state of the US economy.
EURO GAINS EYED The euro was down 0.2 percent on the day at $1.4660, with topside gains capped ahead of a hefty options barrier suspected at $1.47. Asian central banks were also seen selling the euro ahead of that level, traders said.
It barely got a lift from confirmation of quarterly euro zone GDP data, showing the currency bloc grew 0.8 percent in the January to March period.
Above $1.4700, the euro faces resistance at $1.4732, a 78.6 percent retracement of its May 4-23 fall. A break of that could take it back to the May 4 peak around $1.4939, ahead of the psychological level of $1.5000.
Many investors expect the euro to push higher, as the European Central Bank on Thursday is widely expected to flag a rate rise for next month, reinforcing the view that euro zone interest rates will rise much faster than US rates.
While concerns about the impact of Greece's debt problems on the rest of the euro zone will continue to haunt the single currency, the ECB has signalled it is determined to keep raising rates to tame inflation risks.
Analysts said the euro remained vulnerable to jitters over a potential restructuring of Greek debt but front-end implied volatilities for euro/dollar have eased in recent sessions, suggesting increasing confidence among investors.
"Since the end of May people have relaxed a little bit because they think there's going to be a deal on Greece. They feel much more comfortable about it than they did last month," said Sebastien Galy, currency strategist at Societe Generale.
Meanwhile, sterling came under fire, falling to a one-month low versus the euro of 89.76 pence and a session low of $1.6355 against the dollar after credit rating agency Moody's repeated a warning that the UK could lose its prized triple-A rating if it misses economic targets.
Moody's said Britain's rating outlook remains stable but that weaker growth and slippage in the government's fiscal plans could lead to a reassessment.
Copyright Reuters, 2011