The euro fell 0.7 percent and the Australian dollar 0.6 percent against the yen, and the European currency triggered sell orders as it headed down to 112.00 yen, with more sell stops expected below that threshold.

Talk of month-end yen demand from Japanese exporters as well as dollar selling by overseas hedge funds who had bought the pair the day before helped push the Japanese currency nearer to Monday's 15-year peak of 80.41 yen per dollar and within a yen of its record trough of 79.75 set in 1995.

But the major currencies were broadly in the ranges that have confined them in the past few weeks as investors wait to see if the Fed says next week that it will resume quantitative easing as many expect, and if so, in what size and over what time horizon.

"Overall the moves seem to be of the position unwinding variety," said a trader for a Japanese brokerage house.

Japanese shares also fell, with the benchmark Nikkei average .N225 down 1.8 percent, making some speculate this could temper the dollar's fall as the market might become cautious of Japanese yen-selling intervention.

A falling share market is seen as one of the conditions which could prod Japanese authorities to intervene, after they did so in September to counter a push higher in the yen.
 

U.S. bond yields have risen this week partly as euphoria over the Fed's likely asset purchase programme is being replaced by doubts over the size of such a move. [US/]

"A model player's buying is pushing up the euro in thin trade. But given that U.S. bond yields have risen, the dollar will go in the same direction in the near term," said a trader at a Japanese brokerage.

The dollar's fate has had a close correlation to U.S. yields and their gap with rates on other currencies, as increases in U.S. yields -- other things being equal -- tend to help the greenback by making dollar investments more attractive.

With the gap between Japan and U.S. two-year yields near a three-week high and that for 10-year yields near a 2-½ month high, dollar/yen could have further room to rebound, some traders said.

Dollar/yen JPY= dipped 0.2 percent on the day to 81.60 yen, but it was still more than a full yen above Monday's 15-year low of 80.41 yen.

 

The euro EURCHF= rose to 1.3691 francs, its strongest since Aug. 11, with traders citing reports of a large option barrier at 1.3700 francs due to expire later on Wednesday.

The Swiss franc earlier hit a one-month low versus the dollar CHF= of 0.9915.

Data has indicated economic momentum will likely slow in Switzerland in coming months, albeit from a high level.
 

The U.S. currency steadied against other currencies, with the euro stuck below $1.40 as market participants pondered how much monetary easing the Federal Reserve would opt for and how much may be priced in to an already weak U.S. currency.

Helping steady the dollar were comments by New York Fed President William Dudley overnight, who said the economic context would determine whether an incremental or big bang approach to asset purchases was better.

The market was also wary about pushing the dollar lower versus the yen due to worries about possible intervention after Japanese Finance Minister Yoshihiko Noda said Japan would take decisive steps on forex when needed.

At 0746 GMT, the dollar was up 0.5 percent at 81.15 yen JPY=, with traders citing talk of Japanese investors buying to take it above reported stop losses at 80.90 and 81.05 yen.

The dollar's record low of 79.75 yen has become a focal point. It hit a 15-year trough at 80.41 yen on Monday, with players wary Japan may intervene if it nears 80.00
 

The dollar dropped to as low as 80.65 yen JPY= on trading platform EBS, its weakest level since 1995 and down about 0.9 percent on the day.

The market is wary that Japanese authorities might intervene to defend the 80.00 yen level to prevent the dollar from reaching the record low, after they stepped in to sell yen on Sept.15 for the first time in more than six years.

Since then, however, the dollar has continued to fall across the board as the market has anticipated a second round of quantitative easing expected from the Federal Reserve later this year, possibly at its next meeting on Nov.2-3.
 

The euro EURCHF= rose to as high as 1.3544 against the Swiss Franc, and was up 0.55 percent for the day. Semi-official names were cited as buyers of the dollar/swiss pair CHF=.

The dollar rose as far as 81.84 yen JPY= from about 81.00 yen before the comments came out and the euro fell 0.6 percent in a matter of minutes as the market, taking the comments to imply that the dollar did not need to fall further against major currencies, covered dollar short positions.

"It's become a bit difficult to test the dollar's downside for now," said Katsunori Kitakura, chief dealer at Chuo Mitsui Trust Bank.

"It seems as if the G7 has formed a united front ahead of the G20 meeting, as he's saying he's mainly focusing on emerging economies when it comes to currencies."

In an interview in the Wall Street Journal, Geithner divided currencies into three categories, with the first, including China's yuan, undervalued by any measure, while the second were of emerging economies with flexible exchange rates that intervene or impose taxes.

The third was the major currencies, "which are roughly in alignment now", he was quoted as saying.

The dollar later retreated to 81.25 yen, up just 0.2 percent on the day, as the market examined the comments more closely.
 

The dollar index dipped 0.2 percent to 78.041.DXY =USD after climbing more than 1.6 percent the previous day.

But its breach of resistance near 77.93, its Oct. 12 high, and through 77.894, a 23.6 percent retracement of its August-October slide, could pave the way for a move to the 78.96-98 area, which would be a 38.2 percent retracement of that August-October drop.

Investors had increased their bets against the dollar in recent weeks on heightened market expectations for the Federal Reserve to unveil a second round of quantitative easing as early as November.

That positioning had pointed to the risk of a short-covering bounce in the dollar.

"I get the sense that the dollar could rise further in the near term," said Hideki Amikura, deputy general manager for Nomura Trust and Banking's foreign exchange section.

"Market moves fuelled by excessive liquidity stemming from the United States may be drawing to a close," Amikura said.
 

With quantitative easing from the Federal Reserve now well-priced in ahead of its Nov. 2-3 meeting, currencies have broken higher ground against the dollar, with the euro topping $1.4160 last week and the Australian dollar testing parity.

But squeezing out more gains is likely to be tough until the market sees how sizeable QE will be, with one trader saying, for Tuesday at least, short-term players were simply flipping positions within tight ranges.

The euro has failed to clear $1.4000 again after Friday's surge above $1.4100 and this was seen as a caution by some that more long euro/short dollar positions could unwind, with the euro's Oct. 12 low of $1.3775 EUR= seen as a possible target.

"I think we will see a pull-back in the euro in the near-term," said a Japanese brokerage house trader, noting the recent build-up of short dollar positions.

"The market probably has gone as far as it can go based on the factors in the United States."

The euro was flat at $1.3933, well below Friday's eight-month high. Initial support is expected at $1.3825, with resistance up at $1.40 and a move above $1.4050 needed to restart its rally.
 

The dollar is on the verge of sliding to a 27-year low against the Australian dollar, which shot up after surprising strength in the job markets revived talk of a rate hike by the Reserve Bank of Australia.

The dollar's latest decline has made many traders nervous about Japanese intervention, as the U.S. currency was flirting with the levels where Tokyo started its first intervention in six years on Sept. 15.

Still, some market players speculate that Japan may refrain from intervention ahead of a Group of Seven (G7) policymakers meeting this weekend where the threat of "currency war" is likely to dominate discussion.

Fuelling that view were comments from U.S. Treasury Secretary Timothy Geithner on Wednesday that global institutions must persuade emerging nations such as China to let their currencies rise or risk a round of competitive depreciations that would endanger the world economy.