The dollar was on the defensive against the euro today, holding near five-week lows, after a big short squeeze in the single currency ahead of US jobs data, while the yen lost ground as the squeeze spilled into Asian trade.
The dollar has fast lost favour this week, undermined by concerns about the strength of the US economy, and it plunged yesterday, hitting its lowest this year against the yen, as short-covering by euro bears unleashed a chain reaction.
The dollar index, a gauge of its performance against six other major currencies, hovered just above a two-month low after it shed 1.6 per cent yesterday.
The index was steady at 84.69, having broken through its 55-day moving average at around 85.
The greenback staggered up against the yen after hitting a seven-month low of 86.96 yen in the fray. But it faced selling at 88 yen, with the market on alert for any comments from Japanese authorities which might signal concern about yen strength.
The Australian dollar initially rose versus the greenback and climbed against the low-yielding Japanese currency after Australia's government announced a watered-down version of a proposed mining tax, easing concerns it could hurt business investment and share prices.
The US Labor department releases its June employment report at 1230 GMT. Economists are forecasting a loss of 110,000 jobs in June compared with an increase of 431,00 jobs in May.
A negative surprise could weigh further on the dollar, after soft economic numbers in recent sessions sent investors worried about a double-dip recession into safe-haven US Treasury bonds and pushed yields down.
Dealers said Japanese importer buying of the dollar ahead of the three-day weekend in the US helped lift it 0.4 per cent to 87.98 yen, but its drop through 87.95 yen yesterday, when options triggers sent it down, meant it had broken below the 95-88 yen range held so far this year.
One dealer said more options triggers lay below 85 yen. The dollar fell to a 14-year low of 84.82 last November.
The euro made its big move against the dollar yesterday, surging more than 2 per cent to $1.2541 in its biggest one-day advance since mid-March last year, and on Friday it was holding around $1.2500.
Concerns about euro zone debt, the banking sector and liquidity problems had led investors to short the euro and growth-linked currencies and pile into safe-haven currencies like the Swiss franc and the Japanese yen in recent sessions.
But some of those concerns eased after Spain successfully sold €3.5 billion of five-year bonds, prompting many to unwind those short positions. Thinning liquidity ahead of the long Independence Day weekend in the United States also exacerbated the moves.
Traders said the euro/dollar was struggling to move higher ahead of the US employment data.
Charts indicate the euro faces near-term resistance at $1.2570, a 38.2 per cent retracement of its decline from $1.3692 in April to $1.1876 in early June. Resistance could also come in at its 55-day moving average around $1.2550.
It was steady at 1.3266 Swiss francs after hitting a record low 1.3073 yesterday, and its gains today came instead against the yen, where it rose 0.2 per cent to 109.92 yen.
Reuters