TOKYO: The yen hit a three-week high on Tuesday on a flurry of stop-loss buying that kicked in after investors cut back on massive short positions built in recent weeks, while the euro licked its wounds after disappointing euro zone manufacturing and jobs data.
The dollar tumbled from the previous day's peak of 83.31 yen to a session low of 81.55 after stop-loss trades were triggered in the 81.90-80 area, with traders citing sales by offshore leveraged funds and some Japanese investors.
The fall was prompted after traders rushed on Monday to cover short positions, which according to the Commodity Futures Trading Commission spiked to a 4-1/2 year high in the week ended March 27.
The dollar later recovered but was still down 0.3 percent on the day at 81.85 yen, with investors thinking it was simply taking a break, sparked by a dip in US Treasury yields after its February-March rally to 84.19 from 76.21.
"The yen has strengthened technically after this move, and while its long-term weakening trend remains intact we may see further correction on the dollar rally over the next few weeks," said Teppei Ino, a currency strategist at Bank of Tokyo-Mitsubishi UFJ in Tokyo.
He said that as the dollar broke below support at the kijun line on Ichimoku charts at 82.10 and the five-day moving average pierced the 21-day moving average to form a "death cross", the greenback was poised to test support at the lower Bollinger band at 81.33.
The apparent correction is kicking in after the dollar's 6.4 percent rise this year saw it overshoot on the topside to be above its fair value of around 81.65 based on US Treasury yield signals, said Societe General analyst Sebastien Galy.
"It suggests we may still fade a bit lower towards that level, helped by the upcoming Fed minutes. Eventually though sentiment will turn around, with the NFP as the next potential trigger for a move higher," he added, referring to Friday's US non-farm payrolls report.
The yen also muscled in on the euro, hitting a two-week high 108.70, and pulling away from Monday's low of 111.13, a move that confirmed strong resistance for the euro above the 111.00 area after it failed to breach that for three weeks in a row.
LICKING WOUNDS
The euro licked its wounds after dipping to this week's low of $1.3278 on Monday as data showed unemployment in the euro zone reached its highest in almost 15 years in February, and manufacturing contracted for an eighth straight month in March.
It recouped some losses, gaining 0.2 percent to $1.3344 , inching back towards Monday's high of $1.3381. Since the mid- to late-March rally from $1.3000 to $1.3386 fizzled out it has been drifting in a relatively thin $1.3250-3400 range.
The data from the euro zone was in contrast with the US Institute for Supply Management's index of manufacturing activity, which rose to 53.4, exceeding forecasts. On Sunday, China's Purchasing Managers' Index hit an 11-month high.
Commodity currencies such as the Australian dollar also lost ground on the yen, but were a shade stronger versus the dollar ahead of an interest rate decision by the Reserve Bank of Australia.
The Aussie bought $1.0444, up 0.3 percent on the day, nearing immediate resistance at the high of $1.0470 hit on Monday. On the Japanese currency, it fetched 85.55 yen , down from the overnight high of 86.74 yen.
The Aussie was supported by Australian retail sales data, which came out broadly in line with forecasts, but traders awaited the more important RBA decision at 0430 GMT.
A recent batch of soft local data had prompted markets to price in a one-in-three chance of a rate cut, although none of the 18 economists polled by Reuters expect a move.
"We expect the RBA to keep rates at current levels for the rest of the year," BNP Paribas analysts wrote in a client note.
"With euro zone concerns considerably abating, the external environment, which has been one of the RBA's main concerns, may put the central bank at ease. In addition, the China PMI rebound supports the RBA's apparently relaxed stance on China."
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