The yen fell on Wednesday and high yielding currencies rallied as stronger equity markets bolstered risk appetite, prompting investors to move back into carry trades. The dollar stayed under pressure versus the euro and a basket of major currencies on continued worries that a struggling US housing sector and lingering credit problems could hurt the broader economy.
Such a view could be confirmed by any signs of weakness in the US retail sales data for October due at 1330 GMT, while any slowdown in producer price inflation data, also due at 1330 GMT, could make it easier for the Federal Reserve to continue cutting interest rates.
A pick up in risk appetite - sparked on Tuesday after Goldman Sachs reassured investors that it does not face big credit market losses - prompted a rise in global equity markets. This made currency investors more comfortable about holding risky carry trade bets in high-yielding currencies funded by cheap borrowing in the yen.
"It's all about risk appetite moving back into the ascendancy with equity sentiment improving, which is bad news for the yen," said Jeremy Stretch, market strategist at Rabobank.
"Economic weakness in the US is keeping the dollar under pressure and further weak data from the retail sector, if it's combined with higher producer prices, could prove to be a toxic combination as it would make the job much harder for the Fed." The euro gained 0.5 percent to 162.91 yen, pulling away from a two-month low of 158.66 yen hit on Tuesday.
The New Zealand dollar rose 0.4 percent against the low yielding currency to 84.72 yen. However the yen trimmed earlier losses and turned flat against the US dollar after US stock futures pointed to a lower opening on Wall Street and European stocks pared back earlier gains.
By 1207 GMT the dollar was steady at 110.93, having earlier climbed as high as 111.55 yen. The euro rose 0.6 percent to $1.4690, just over half a cent away from record highs hit late last week.
The dollar also fell half a percent against a basket of major currencies to 75.536, inching back towards a record low of 74.978 hit late last week. Touching on recent currency market moves, Bank of Japan board member Atsushi Mizuno said falls in the dollar's trade-weighted value have helped improve global imbalances by boosting US exports and supporting the nation's economy, a benefit he described as "underestimated."
Mizuno made the remarks in a speech on November 7, a text of which was released by the BOJ on Wednesday. Sterling fell broadly after the Bank of England's Quarterly Inflation Report signalled that rates would need to be cut in the future. The pound hit its lowest level in four years against the euro at 71.12 pence. Market attention will also be on Federal Reserve Chairman Ben Bernanke, who will speak about Federal Open Market Committee Communications at 1410 GMT.
Ahead of that, US retail sales growth is seen easing to a monthly 0.2 percent in October from September's 0.6 percent. "Retail sales are the key release, with markets sensitive to any signs that weakness in the housing market is spreading to consumer spending," said RBC Capital Markets in a note to clients.