The dollar eased against a basket of currencies after six straight days of gains on Wednesday, a flat performance for equities and commodities markets prompting profit-taking by some of those who have backed the US currency in the past week.
The yen gained half a percent and the euro around 0.2 percent, halting a steady march by the greenback since it hit respectively 19- and 9-month lows at the start of May.
A series of threats by Japan to intervene on its currency have had something to do with that turnaround and Koichi Hamada, an economic adviser to Prime Minister Shinzo Abe, was the latest to sound a currency market warning.
But many analysts say the bigger driver has been a general reluctance to drive the dollar much weaker than $1.15 to the euro and $1.45 to the pound at a time when the US economy still seems far stronger than its developed world peers.
US debt yields, however, continue to fall on the back of further falls in expectations for interest rate rises over the next 18 months, weakening the main argument for any further gains in the dollar.
“The move that we’ve had over the past 5-6 trading days is really due to the dollar just becoming too soft,” said Michael Sneyd, a strategist with BNP Paribas in London.
“We are still looking to sell the dollar against some of the other majors but we’re hoping for another bit of a rally in the dollar to sell into.”
The dollar index, which tracks the greenback against a basket of six other currencies, shed 0.2 percent to 94.108, moving away from a two-week high of 94.356 set overnight.
It was down 0.5 percent at 108.66 yen after climbing to a two-week high of 109.38 yen early in the Asian session. Against the euro it fell 0.1 percent to $1.1389.
BNP’s Sneyd argued that the retreat in US yields since in the past week suggests that investors are coming to the conclusion that it is not just global factors that are likely to keep the Fed on hold this year.
Many economists say the US economy still lacks the investment that will drive greater underlying demand growth and the scale of popular concern over growth evident in the US presidential campaign only argues against raising rates soon.
With the global mood more uncertain, that may put Japan, traditionally a safe haven for capital in times of stress, in a yet tighter spot. Analysts believe it will be wary of intervening to offset flows of money into the yen before it hosts a G7 meeting later this month, but Tokyo is clearly unhappy with a 14 percent rise in the currency since December.
Hamada said on Tuesday Japan will step in to foreign exchange markets if the yen strengthens to 90-95 per dollar, even if that upsets the United States.
“The tone of the verbal interventions has become much more outspoken over the past few days which no doubt has made some traders feel nervous,” Commerzbank analysts said in a note.