The dollar extended losses against the euro on Thursday on worries that its recent rally on expectations for higher US interest rates might have gone too far and on caution ahead of US jobs data.
The dollar had taken a hit on Wednesday after a gauge of the US service sector showed growth slowed in September in the wake of devastating hurricanes. That contrasted with manufacturing data last week that showed a boost due to demand from regions hit hardest by the hurricanes.
"Since the Federal Reserve's intention to raise rates has sunk into the market, we have had soft data," said Etsuko Yamashita, chief economist at Sumitomo Mitsui Banking Corp.
"We are seeing an adjustment in the dollar, stocks and bonds. I don't think the trend has been reversed." Talk that Venezuela was moving its reserves out of US Treasuries and that Russia may revalue the rouble to keep inflation in check also weighed on the dollar, although they were likely used as excuses to sell the currency, traders said.
A Venezuelan central bank director, Domingo Maza Zavala, was quoted in the Financial Times newspaper on Thursday as saying the country had transferred a large part of its $30.4 billion foreign reserves out of US Treasuries over the last four months.
"The Venezuela story was the trigger for the taking out of stop-loss levels" that propelled the euro higher, said a trader at a Japanese bank.
Reuters had already reported on Monday, in an interview with Maza, that Venezuela had reduced US Treasuries in its reserves.
A Russian media article that the nation's central bank chief had said the Bank of Russia could revalue the rouble had given the euro additional support earlier in the day, traders said.
But a central bank source told Reuters that its chief, Sergei Ignatyev, had not given any interviews or made any speeches recently.
The remarks quoted in the article, an opinion column in Moscow News, appeared identical to a statement he had made in June, but in that speech Ignatyev said such a policy option was possible in theory but would cause problems for the economy and banks.
The euro bought $1.2060, up around 0.7 percent from the level in late US trade and well above the three-month low of $1.1900 hit earlier in the week on electronic trading platform EBS.
The dollar eased to 113.85 yen from 114 yen, further off the 16-month high around 114.40 yen marked this week.
Traders said that market players closed long-dollar positions after the currency's run higher this week and ahead of US payroll figures on Friday. Economists surveyed by Reuters expected to see a loss of 129,000 jobs in September as layoffs in the wake of Hurricane Katrina offset gains in the rest of the country. The Institute for Supply Management's services index fell to a 2-1/2 year low of 53.3 in September from 65.0 in August. That was far below economists' forecasts for 61.0 and barely above the 50 mark that separates expansion and contraction.
The data dampened recent optimism that the US economy will quickly recover from damage caused by hurricanes Katrina and Rita.
The dollar had risen to 16-month highs against the yen and three-month peaks versus the euro earlier in the week on a chorus of comments from Fed officials expressing concern about inflation, supporting expectations the Fed would stick to its tightening campaign.
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