The sudden jump triggered a wave of stop-loss buying and forced some traders to lighten their dollar long positions ahead of the Federal Reserve’s policy meeting later in the day. "The upswing in euro caught many flatfooted," said David Watt, a currency strategist at RBC Capital Markets.
The sharp moves, however, highlighted the thin and choppy year-end trading conditions that are likely to persist as more and more investors close their books for the upcoming holidays.
"Many players are absent, leaving the market driven by short-term trading," said a trader at a European bank in Tokyo.
The dollar’s decline also followed an abrupt drop in US Treasury yields and Moody’s warning that it could move a step closer to cutting the US triple-A credit rating.
Improved appetite for riskier assets on growing optimism about the US economy and China keeping interest rates on hold all conspired to push the greenback down more than 1% against a basket of major currencies.
"It looks like it was more a squeeze of positioning than anything else. Particularly in the euro because we know the market is well short," a trader at a US investment bank said.
"I’d suggest a lot of that very short hot money positioning has been taken out of play, so we should get back to quieter ranges in Asia."
The euro was at $1,3395, little changed on the day and off Monday’s high of as $1,3434.
The trader said he expected the euro to struggle above $1,3400 and resistance ahead of parity to cap the Aussie.
Its December 6 high of $1,3452 is also seen as near-term resistance.
A break of that level would take it to a three-week high, though persistent worries over the debt of peripheral countries in the eurozone means the euro faces an uphill battle to clear that point.
Indeed The European Central Bank stepped up its purchases of government bonds last week, although the amount was still well below levels reached last spring.
Hideki Amikura, forex manager at Nomura Trust and Banking, said he expected the euro to keep falling in the longer term towards parity against the dollar.
But he added that strength in the German economy could be expected to counter the effect of debt worries from time to time, making the euro highly volatile.
"Germany has had negative interest rates for quite a long time. German manufacturers are doing very well now and the DAX index has been rising sharply. That should certainly worry (European Central Bank policy maker and Bundesbank head Axel) Weber," he said.
The dollar was little moved against the yen at ¥83,48 after shedding 0,6% on Monday.
"The dollar is under pressure as Treasury yields, especially in the medium-term zone, have dropped quite significantly ahead of the FOMC meeting," said Gen Kawabe, manager at Chuo Mitsui Trust and Banking.
Buyers for US bonds emerged after benchmark Treasury yields surged to six-month highs. This helped knock the 10-year yield down to 3,28% from 3,39%.
The yields fell even as Moody’s said if US President Barack Obama’s tax and unemployment benefit package became law, in a plan agreed by Obama and Republican leaders last week, debt levels could rise lifting the likelihood of a negative outlook on the rating.
The Federal Reserve policy board meets later on Tuesday and is expected to reaffirm its quantitative easing policy even while acknowledging the better run of data recently.
Commodity currencies shone on record high copper prices and gains in other metals such as gold.
The Australian dollar put on nearly 1,5 cents on Monday to come close to testing parity. It was last at $0,9959, near a one-month high of $0,9983 hit on Monday.
The Aussie hit NZ$1,3258 for the first time since late 2000, with the kiwi dollar coming under pressure after New Zealand retail sales slumped in October, leading the market to further push out the timing of any hike in interest rates. For the latest updates PRESS CTR + D or visit Stock Market news Today
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