The dollar plumbed two-month lows against the euro on Thursday after comments from Japan's Prime Minister raised more fears about Asian central banks diversifying their FX reserves away from the US currency. Junichiro Koizumi said in response to questions in parliament that, generally speaking, diversity in foreign exchange reserves was necessary but the Japanese Finance Ministry quickly clarified it had no plans to shift funds out of the dollar.
The foreign exchange market has been particularly sensitive to any signs of a change in reserves after a South Korean central bank report that referred to reserve diversification triggered a fall in the dollar last month.
"It makes the market nervous and comes at a time when the market is bearish toward the dollar," said Steven Saywell, chief currency strategist at Citigroup.
"It's unlikely that Japan will actually diversify but it's a strong reminder that other countries are."
The dollar fell as far as $1.3456 against the euro, its lowest since January 4 and two cents away from record lows set in December. It was trading at $1.3422 at 1215 GMT, around 0.3 percent lower on the day.
The euro also hit 2005 highs against the yen at 140 yen. However, the greenback rose against the yen to trade at 104.12 yen.
It found support from data showing Japan's core machinery orders fell 2.2 percent in January from a month earlier, worse than market expectations for a rise of 2.4 percent.
Sterling slipped a little against the euro and the dollar after the Bank of England kept interest rates unchanged at 4.75 percent. Some investors had betted on the outside chance of a rate hike.
Any central bank shift away from dollars is seen as likely to make it harder for the United States to attract sufficient flows to finance its huge current account deficit, the main factor behind the dollar's losses to record lows against the euro in December.
Soon after Koizumi's comments, a senior Finance Ministry official told Reuters that it had no plan to change the composition of currencies in Japan's $840.6 billion foreign reserves - the largest in the world.
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