The dollar fell against the euro on Thursday, reversing some of the previous day's gains on a string of weak US economic reports that renewed worries about a deepening economic recession and revived safe-haven flows into the greenback.
The dollar's gains were capped after a slew of US plans to shore up the economy amid the widening financial crisis raised concerns about the health of the nation's balance sheet, and prompted some players to question whether the dollar can keep its strength in the medium term, analysts said.
Trading overall stayed subdued in Asia as many investors sat on the sidelines with US markets closed for the Thanksgiving holiday, but thin market liquidity could also cause choppy price movements, traders said. "The market is trying to find out whether the dollar will shift to a falling trend or not, after seeing it gain on the theme of risk aversion," said Kengo Suzuki, a currency strategist at Shinko Securities.
The dollar had been lifted by demand from banks for dollar funding, as well as portfolio managers and hedge funds dumping assets and boosting cash holdings as they face investor redemptions.
The dollar may be dented by its falling yields, with US 10-year Treasuries dropping to a fresh five-decade low below 3.0 percent on Wednesday. Meiji Yasuda Life Insurance, Japan's No 3 life insurer, said it would be moving some money out of US Treasuries because of their falling yields.
"Given the market is in a corrective phase, the euro may rise as high as $1.35 in the next few weeks, though an expected interest rate cut by the European Central Bank may make the euro's rebound choppy," said Hideaki Inoue, chief manager of forex trading at Mitsubishi UFJ Trust. The euro remained vulnerable versus the dollar and the yen after the ECB cemented expectations for another interest rate cut next week as inflation in Germany, the euro zone's biggest economy, tumbled this month.
The euro rose 0.3 percent to $1.2923, after falling as low as $1.2819 during the previous session partly on pessimistic views about the impact of a 200 billion euro ($258.4 billion) European stimulus plan to cope with the financial crisis. The euro had rebounded above $1.30 earlier this week, recovering from a 2-1/2-year low of $1.2329 hit in late October. Major currencies were little moved by a series of attacks in India's financial capital Mumbai.