The dollar fell almost half a percent against the yen on Monday after a newspaper report said Japan had ended its policy of intervening in the foreign exchange market to weaken its currency, a move that bolstered the yen.
Japanese Ministry of Finance officials denied the Times of London report, which was based on a Bank of Japan (BoJ) source, that they would no longer seek to weaken the yen and said their currency policy was unchanged.
The report initially sent the yen to six-week highs against the dollar before the Ministry of Finance (MoF) reminded markets that it, and not the BoJ, controlled foreign exchange policy and that it would continue intervening as needed.
"We are still focused mainly on the potential that the Bank of Japan has decided to officially end its intervention. This is helping to boost the yen," said Mike Malpede, senior foreign exchange analyst at Refco Group Ltd.
"Unless there is some news item that comes out, we will trade in narrow ranges today," he said.
The dollar also fell against the euro after touching the highest level this year earlier on the global day as traders bet the European Central Bank would cut interest rates on Thursday to support the bloc's fragile economic recovery. However, speculators reversed the trend and bought back the eurozone currency.
"The market is very disappointed that there was no follow-through on the break of $1.2050 level," said Hugh Walsh, vice president of foreign exchange at Fortis Bank in New York.
"There are also some doubts creeping into the market about whether the ECB is going to really cut (rates) this Thursday or maybe wait until May. What you are seeing is people taking some bets off the table," Walsh said.
By midday in New York, the dollar traded down 0.4 percent at 105.45 yen, after hitting a six-week low. A break beyond 105.16 yen would be the yen's strongest in 3-1/2 years.
The euro traded slightly higher against the dollar at $1.2135, after retracing earlier losses to $1.2050 - its lowest level so far this year.
The euro fell 0.4 percent against the yen at 128.00 yen after softening to 127.26 yen, a five-month low.
The market will focus on the ECB's Thursday meeting to see if it cuts interest rates from its current 2 percent and on Friday's US employment data to see if the US economy is recovering, analysts say.
Some traders believe the ECB will not wait until its June meeting after President Jean-Claude Trichet said last week that the central bank would reassess its outlook if consumer demand does not improve.
Other ECB officials reprised this dovish tune later in the week, with Executive Board member Gertrude Tumpel-Gugerell saying on Friday Europe's recovery was uncertain and data mixed, with no sign that consumer demand was firming.
Belgian Finance Minister Didier Reynders said on Monday it was up to the ECB to decide when the time was right to change interest rates, but he had noted many recent statements were pointing in that direction.
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