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.
 

Concerns over Greece were hanging over the euro zone, as the cost of protecting its government debt against default hit a record high. [ID:nLDE65N0J2]

U.S. economic reports on weekly initial jobless claims and durable goods orders for May came in largely in line with expectations and saw the dollar pare gains against the euro and extend declines against the yen.

The dollar had come under pressure in Asian trading as investors initially took the view that the Fed's renewed pledge to keep rates on hold for an extended period would be a positive for the world economy.

But European investors chose to focus on the Fed's scaling back of its assessment of the pace of recovery, leading them to buy the yen and to a lesser extent, the dollar.

"The concerns over peripheral Europe increased this morning, and the market is more focused on that than U.S. data," said Jessica Hoversen, a fixed income and currency analyst at MF Global in Chicago.

In a statement at the end of a two-day meeting, the Fed took note of pockets of weakness in the recovery, and also issued a cautionary note about volatile markets in light of Europe's debt woes.

The euro fell 0.2 percent versus the dollar EUR= at $1.2286, having risen to $1.2351 in Asia. Traders reported demand at $1.2270, which supported the downside though the session low posted at $1.2263.
 

Trading the dollar based on the short-term direction of the yuan and its mid-point fixing had become a market fad this week, in the wake of China's decision to loosen the yuan's 23-month-old peg to the U.S. dollar.

But traders said such trading interest was ebbing after the yuan fell on Tuesday on hefty dollar purchases by state-owned banks, which suggested the central bank was trying to create two-way trade and check the yuan's gains.

Instead, a sharp fall in U.S. stocks .SPX and a subsequent drop in the Nikkei .N225 helped support the dollar and the yen, which are favoured when risk aversion spikes and doubts over the health of the global economy emerge.

"The sense in the market probably is that it is better not to stop taking short positions in the euro," said a trader at a Japanese bank.

"I think the focus is on whether the euro will fall back below $1.2000, and how far it may fall from there," he added.

The euro is now hovering close to a support area near $1.2255.

That level marks a 38.2 percent Fibonacci retracement of the euro's recent rally from its four-year low of $1.1876 hit in early June on trading platform EBS to a one-month high of $1.2490 hit on Monday.
 

After failing to break above $1.2350-55 twice in the past 48 hours, the euro EUR= is at risk of retreat to around $1.2175, a 38.2 percent retracement of its rebound from a four-year low below $1.19 set last week.

"Players think the euro's rise led by short-covering has come to a near-term end," said an FX trader at a major Japanese brokerage.

"We hear overseas investors with real money, such as pension funds, are picking up the euro," the trader said. "But besides them, there are few aggressive buyers of the euro, leaving the single currency vulnerable."

Traders said the euro was likely to see selling into rallies as tolerance for risk subsided on a revival in concerns about euro zone fiscal problems.

"Some people want to reduce risk positions on worries about Spain," said Daisuke Karakama, market economist at Mizuho Corporate Bank.

But the euro's fall has not been as sharp as in May when worries about the impact of Europe's fiscal problems drove it down rapidly, and this indicated that although some shorts have been covered, the market is still short euro longer term, Karakama said.

"The euro would have been sold much more hysterically if it were a month ago," he said.

It slipped 0.3 percent from late U.S. levels to $1.2268. It is more than half a percent below the two-week high of $1.2354 hit on Wednesday but still up about 3 percent from the four-year low of $1.1876.

The market will be watching a Spanish bond auction later in the day after the spread of Spanish government bond yields over benchmark Bunds soared to a euro lifetime high on Wednesday.
 

Speculation for a strong reading of U.S. jobs data due on Friday also prompted demand for riskier currencies, pushing the Australian and New Zealand dollars higher and supporting even the euro, which has been plagued by euro zone debt problems.

"Equity markets are looking better today," said Marcus Hettinger, global currency strategist at Credit Suisse in Zurich. "At least for today, we're seeing some stabilisation in risk appetite."

Stock markets around the world have been stabilising after deep losses suffered last month on concerns that Greece's debt woes may spread to other euro zone nations.

European shares .FTEU3 rose roughly 2 percent in early trade, pulling further away from a nine-month low hit last week.

Investors took heart in U.S. data released on Wednesday, which showed surprisingly strong pending home sales for April and a jump in May auto sales.

Expectations that U.S. payrolls on Friday will show that 513,000 jobs were created in May were also helping to whet the market's appetite for riskier assets.

U.S. President Barack Obama on Wednesday said he believed the jobs report would show strong growth.

By 0744 GMT, the euro traded 0.3 percent higher on the day at $1.2285, having climbed as high as $1.2326 at the start of European trade.

The single currency has found its footing after sliding as low as $1.2110 on Tuesday, its weakest in more than four years.
 

Rising tensions in the Middle-East following Israel's storming of aid ships bound for Gaza fuelled safe-haven demand for the dollar, with disappointing Chinese data also hurting risk appetite.

The European Central Bank warned on Monday that euro zone banks faced up to 195 billion euros in a "second wave" of potential loan losses over the next 18 months due to the financial crisis, and said it had increased purchases of euro-zone government bonds.

"Focus is back on to euro zone problems this morning and it is the bad loans story that is weighing on the euro in early trading," said Audrey Childe-Freeman, currency analyst at Brown Brothers Harriman.

At 0730 GMT, the euro was trading with losses versus the dollar EUR= of around 1 percent at $1.2185.

It was hovering above a four-year low of $1.2143 struck on May 19. Near-term support is seen around $1.2135, the 50 percent Fibonacci retracement of the currency's 2000-08 advance.

The euro's close on Monday marked its sixth consecutive monthly decline, the longest losing sequence the single currency has experienced since 1999, just after its inception.

Versus the yen, the euro traded with losses of over 1 percent at 110.60 yen. It also slipped to a 1-year low versus sterling EURGBP=D4 of 84.15 pence.

"The euro is still reacting to negative issues," said Ian Stannard, currency strategist at BNP Paribas, adding that Spain's downgrade by Fitch last week was also weighing on the currency.

Fitch Ratings cut Spain's credit ratings to AA+ from AAA on Friday, saying its economic recovery would be more muted than the government forecast.
 

The euro gained more than 1.5 percent against the dollar on Thursday after China reaffirmed its commitment to diversifying currency holdings away from the dollar and denied it was reviewing its holdings of euro sovereign bonds

A Spanish parliament vote on Thursday to approve a 15 billion euro austerity package also provided relief. However, it passed by a single vote and investors were concerned about possible strike action by Spanish unions.

Analysts and traders expect trade to be dominated by month-end position adjustment, with UK and U.S. markets closed on Monday for a public holiday.

"The trend is clearly there for more euro weakness and the focus will be on what is happening to the Spanish banking sector and whether there is anything that could ruin this recovery in risk appetite," said Carl Hammer, SEB currency strategist in Stockholm.

"But the market has come to a more mature level (in euro/dollar) and the euro could rebound short-term due to extreme short euro positioning," he said.

At 0746 GMT, the euro was down 0.3 percent at $1.2335 EUR= after rising close to $1.2400 the previous session when stops above $1.2340 were triggered.

Analysts said a key support level was $1.2135, the 50 percent Fibonacci retracement of the 2000-08 advance, just above the recent four-year low of $1.2143.

The euro is down against the dollar more than 7 percent on the month and set for its sixth consecutive monthly fall. Charts show a monthly close below $1.2135 would favour more weakness, with the next downside support at $1.1640, a trough hit in November 2005.

"The euro zone's fiscal problems are deep-seated. No one is truly confident about the euro right now and people think $1.2400 is probably the highest it can reach," a senior trader at a Japanese securities firm in Tokyo said.
 

The euro first rebounded sharply after nearing last week's four-year low earlier in the day, gaining steam as a climb in Asian shares gave a broad lift to yen crosses.

It then extended gains and touched an intraday high after a government official told Reuters that China remains committed to its long-standing goal of diversifying its foreign exchange reserves.

Separately, the head of China's $300 billion sovereign wealth fund, China Investment Corp, told Xinhua news agency in an interview that the Greek debt crisis will not have a big impact on China's overseas investments.

The euro, battered by Europe's debt crisis, had come under more pressure after the Financial Times reported on Wednesday that China was reviewing its euro zone debt holdings because of growing concerns about gaping deficits in countries including Greece and Portugal.

"It is not as if there was some particular trigger, but equities are rising and recently the moves in yen crosses have been linked pretty closely to the stock market," said a trader for a Japanese brokerage house.

"In addition, Singapore is on holiday tomorrow and some overseas markets will be closed on Monday, so this may be short-covering ahead of a long weekend," the trader said.

The euro rose 0.7 percent to $1.2261 EUR=, up about a full cent from its intraday low of $1.2154 on trading platform EBS.

The euro managed to hold above last week's four-year trough of $1.2143 as well as support near $1.2135, which is roughly a 50 percent retracement of its rally from a record trough near $0.8225 to its all-time peak of $1.6040.

But traders said there was good selling interest in the euro at $1.2300.
 

Signs of tighter funding, with costs for banks to borrow dollars in the interbank market soaring to 10-month highs, are driving investors to the relative safety of the U.S. dollar and away from riskier assets and currencies, traders said.

U.S. two-year swap spreads USD2YTS=RR, a key gauge of financial system stress, also widened to one-year highs on Tuesday. They slipped off that peak on Wednesday, but are still about 6 basis points wider for the week.

"Nothing has changed since yesterday. The money market strain is there," said a FX trader at a Japanese trust bank. "That is making players in the currency market very nervous and reluctant to take risks."

Month-end selling from Japanese exporters helped drag the euro lower against the yen, traders said.

The euro fell 0.5 percent to $1.2285 EUR=, staying above Tuesday's low of $1.2177, which was not far from a four-year low of $1.2143 struck last week.

The euro has lost over 7 percent against the dollar so far this month and is heading for its biggest monthly fall since January 2009.
 

News that U.S. Treasury Secretary Tim Geithner will visit the U.K. and Germany next week to meet top economic officials and discuss ways to resolve the European economic crisis also prompted yen selling by some Japanese institutional players.

The news increased speculation that some joint action against continued market jitters could be taken before the Group of 20 summit in Toronto in June, dealers said.

Still, the yen could resume rising if global share prices continue to be weak, lifting demand for the currency, which is considered a safe haven, traders said.

The dollar stood at Y90.14 as of 0450 GMT compared with Y89.52 in New York late Thursday, and the euro was at Y113.82 from Y111.75. The U.S. currency slipped to a two-week low at Y88.95 and its European counterpart to an eight-and-a-half year low at Y109.47 on Thursday due to worries stemming from the European sovereign debt crisis.

Japanese Finance Minister Kan said Friday at a news conference that "markets in principle should determine foreign exchange rate issues, but I think we must closely watch them and ensure that there won't be any excessive yen rises."

"Investors closed their positions before the weekend, using cues from such news" as views grow that the authorities may announce further action to stabilize markets, said Hideaki Inoue, a senior dealer at Mitsubishi UFJ Trust and Banking Corp.

Kan also met Prime Minister Yukio Hatoyama in the afternoon, at which time Hatoyama asked the finance minister to closely watch the wobbly financial markets.

"The news was just used as a reason to sell the yen after its sharp gains overnight, as Kan's remarks weren't really new." said Minoru Shioiri, a senior dealer at Mitsubishi UFJ Morgan Stanley Securities.

Shioiri said there is a chance demand for the yen will return later in the day, pushing the currency back up if New York shares fall further and trigger more risk aversion.

The euro was trading at $1.2623 as of 0450 GMT, up from $1.2480 late Thursday. The ICE Dollar Index, which tracks the dollar against a trade-weighted basket of currencies, was at 85.303 from 85.942.
 

By 1135 GMT the euro fell as low $1.2308 EUR= before bouncing back towards $1.2330. Traders said European corporates were selling the euro above $1.2350. Stocks fell broadly while bund futures hit session highs.