The dollar index fell to 82.242 .DXY, its weakest since early May as the euro EUR= rose as high as $1.2980.

"The market seems to want to sell dollars whatever," a London-based trader said.
 

The Australian dollar slid in early Asian trade after the China Securities Journal reported the economy may lose momentum more than expected later this year.

It temporarily pared losses following the release of Chinese official data but soon started to ease again on the selling by model-based funds, traders said.

"The data has attracted much attention but at the end of the day it wasn't far from market expectations. It showed the Chinese economy is slowing down, but that's what markets have been looking for," said Hideaki Inoue, manager of foreign exchange at Mitsubishi Trust and Banking Corp.

The Australian dollar stood at $0.8772 AUD=D4, down 0.7 percent on the day. It hit a two-month high of $0.8871 on Wednesday.

It also dropped 1 percent to 77.28 yen AUDJPY=R.
 

The dollar could come under more pressure, especially against higher-yielding currencies, in reaction to robust U.S. corporate earnings. Intel Corp (INTC.O) reported results above expectations and gave an upbeat sales outlook, pushing S&P futures higher .SPX. [ID:nN12197658]

Traders said funds were increasingly moving out of cash and low-yielding U.S. Treasuries to buy euro and growth-related currencies. Helping drive sentiment was a strong start to the U.S. corporate earnings season and easing concerns about euro zone's sovereign debt and the financial sector.

The euro EUR= held steady from late U.S. trading on Tuesday at $1.2725. It hit a two-month peak of $1.2739 EUR=EBS on Tuesday, brushing aside a Moody's downgrade of Portugal's sovereign rating by two notches.

Instead, investors chose to pay more heed to the strong response to a six-month treasury bill tender by Greece. The debt-laden country sold 1.625 billion euros ($2.03 billion) of T-bills at a better rate than it pays to borrow under a European Union/International Monetary rescue fund.

"What we are seeing is that cash is being put back to work with all the negative news surrounding the euro zone receding," said Greg Gibbs, currency strategist at RBS, Sydney.
 

The euro held steady at $1.2595 EUR=, with resistance seen roughly around $1.2690, the trendline from the December high. Near-term support is seen near $1.2550, the previous session's low.

Investors were also cautious about the single currency ahead of Greece's return to capital markets for the first time since late April.

The debt-laden country is seeking to raise 1.25 billion euros through a sale of six-month Treasury bills. That could prove to be a litmus test for the euro in the short term ahead of the results of the euro zone banks' stress tests next week, traders said.

A robust response to a Spanish debt auction earlier this month saw the euro rally to two-month highs. That coincided with worries the U.S. was heading towards a double-dip recession, sending the greenback to its lowest in nearly two-months against a basket of currencies.

Those concerns have taken a back seat for now, but traders said real money investors and margin traders were still being cautious, given lingering worries about a global slowdown.

"The way they are positioned, there is still a feeling that a a double-dip recession could happen," said Jonathan Cavenagh, a currency strategist at Westpac, Sydney.

"I think they could be in for a major surprise if a majority of U.S. corporate results beat expectations. That should see the U.S. dollar stage a comeback and hence investors are a bit cautious about going too short."
 

The yen pared initial losses after Japanese election results that showed political uncertainty ahead.

The dollar rose across the board, recovering from a fall against a currency basket late last week to its lowest since early May, as investors crept into dollar-denominated assets, a common occurrence during times of risk aversion.

Investors awaited more details on stress tests on 91 European banks -- the results of which are due later in the month -- as the European Union seeks to restore confidence in the sector.

Analysts said that despite the euro's rally this month, its failure to break above a key downtrend line had stalled its upward momentum.

"We saw a decent comeback in the euro in the past week, so there's been some profit taking on that move," said Kasper Kirkegaard, currency strategist at Danske in Copenhagen.

"There's some nervousness in the market, and prices are rising on risky assets."

Analysts said the efficacy of the stress tests would depend on how much detail they include, and the possibility the results may be thin on in-depth information was weighing on the euro.

 

The ruling Democratic Party of Japan and its coalition must win 56 seats to maintain its Upper House majority. This is a crucial task for Prime Minister Naoto Kan--who is considered an aggressive fiscal reformer--because his first term as head of the DPJ, and thus the premier, will expire on Sept. 30.

For Kan to remain in power, he must be re-elected in an intra-party vote; and to win that race, he can't afford to lose many seats at the weekend, analysts said.

"If they (the DPJ) fail to win 56 seats, there will be the risk of a leadership challenge. That's yen-negative," said David Forrester, a strategist at Barclays Capital.

Latest opinion polls by local media show the DPJ will fall several seats short of a majority.

As of 0450 GMT, the greenback was at Y88.63, up from Y88.38 in New York Thursday. The execution of automated stop-loss dollar-buying orders at around Y88.50 helped the currency's ascent, dealers said.

The euro, meanwhile, was at $1.2684 and Y112.40 from $1.2703 and Y112.27 in New York overnight.

Analysts said the euro is likely to fall ahead though it has rallied of late, hitting $1.1876 on June 7 and Y107.30 on June 29.

"The economic fundamental landscape in the euro-zone remains disconcerting," said Tim Davis, a senior analyst at Morgan Stanley.

Investors are waiting for results of stress tests on European banks, which are due on July 23. Davis said the outcome of the tests could prompt investors to resume a euro-selling campaign.

It is possible there will be "plenty of negative headlines that could propel the euro lower," Davis said. "We'd like to use current levels to sell the common currency" to beef up the long-term investment portfolio.
 

The euro EUR= eased 0.4 percent to $1.2578, after meeting resistance around the May 21 high of $1.2673 and on selling from a hedge fund. It hit $1.2663 on trading platform EBS on Tuesday, the highest in about seven weeks.

Still, one positive factor for the euro was the fact that it finished Tuesday's U.S. trading above resistance at the bottom of the daily Ichimoku cloud -- a signal that its entrenched downtrend may be over.

The euro in mid-December slid beneath the cloud on the Ichimoku chart, the Japanese chart pattern that is closely followed across markets, and had mostly traded below it since then. But its rise back into the cloud suggests the single-currency may have entered a consolidation phase.

"The euro is in a retracement phase in the wake of its drop to below $1.2 and could rise back towards the top of the cloud," said Tokichi Ito, deputy general manager for Trust & Custody Services Bank's forex team.

While worries about the euro zone's debt woes linger and market players refrain from actively taking long positions in the euro, Ito said the euro may see a short-covering bounce towards $1.2800, near the top of the daily Ichimoku cloud.

The euro was also supported after a strong response to a syndicated Spanish debt sale. The robust demand eased some of the worries about the debt problems in the euro zone, although traders said they would remain cautious until the stress test results of the euro zone's banks are out later this month.
 

The Reserve Bank of Australia (RBA) left its cash rate steady at 4.5 percent as expected, saying the global economy had continued to expand, albeit unevenly, with growth in Asia very strong and signs of China moderating to a more sustainable rate.The Aussie fell in thin trading ahead of the announcement as some had expected it to sound a more dovish note, and on the charts it formed a short-term double bottom at $0.8317 AUD=D4, a drop which helped set it up technically for a rebound.

"There were concerns among dealers that the RBA would be very bearish about the economy before the rate announcement. But the central bank was not that dovish, prompting players to buy back the Australian dollar, as well as the euro," Daisuke Karakama, market economist at Mizuho Corporate Bank.

"But there were no new factors out. The only thing we can say is that the euro and the Aussie are in a rebound phase."

The Aussie stood 0.4 percent up on the day at $0.8437 AUD=D4 after earlier dropping to test support at $0.8315, a low set last week.

Against the yen it climbed 0.6 percent on the day at 74.08 yen AUDJPY=R after sliding as far as 72.73 yen.

"The RBA is refusing to panic, as many in the market seem to be," said Brian Redican, senior economist at Macquarie.
 

The euro EURCHF= rose around 50 pips to the day's high of 1.3265 francs, according to Reuters data, as the news prompted broad selling in the safe-haven Swiss currency.

The franc CHFHUF= also hit a session low against the Hungarian forint, trimming some gains from its recent rally against the Hungarian currency.
 

The yen also benefited as Japanese exporters repatriated earnings ahead of the second quarter end, selling euros and dollars, and as a steep fall in Shanghai stocks added to the Japanese currency's safe-haven allure.

Against the dollar, the euro fell 0.4 percent on the day to $1.2235 EUR= after losing 0.8 percent on Monday.

The euro has lost 4 percent against the Swiss franc since mid-June when the Swiss central bank backed off a pledge to fight excessive franc appreciation, shedding about 10 percent this year. A dealer at a Swiss bank said on Tuesday there was no sign of the central bank so far.

European banks must repay 442 billion euros ($545.5 billion) to the ECB on Thursday, leaving a potential liquidity shortfall in the financial system of over 100 billion euros.

"Investors are nervous, shifting their attention back to Europe because a massive amount of money will move there," said Hideki Hayashi, global economist at Mizuho Securities.

"The euro could revisit its eight-year low against the yen, although I think funding worries linked to repayments to the ECB are a bit overdone."

The euro fell as low as 1.3250 francs EURCHF=, the weakest since its 1999 launch, while the dollar edged down 0.2 percent to 1.0846 francs CHF=, above Monday's two-month low of 1.0817.