The dollar fell against the yen for a second straight session on Tuesday, retracing most of its gains posted following last week's robust U.S. nonfarm payrolls report, but the decline came as no surprise after five straight weeks of rises.
"While some shorter-term charts suggest the dollar rally may finally take a breather this week, the fundamental tailwinds remain in favor of continued dollar strength heading into 2015," said Matt Weller, senior currency analyst at FOREX.com in Grand Rapids, Michigan.
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The dollar posted its worst two-day loss versus the yen since February.
Yen gains were also boosted by remarks from Bank of Japan Governor Haruhiko Kuroda, who told a news conference there was no need to adjust monetary policy if the Bank of Japan's 2 percent inflation goal can be met in the middle of the financial year starting next April. As a result, the yen not only rose against the dollar, but also hit a one-month high versus the euro.
The euro was also undermined by a report showing a 4.0 percent month-on-month drop in German industrial output, falling far below a forecast of a 1.5 percent fall. It was the biggest drop since January 2009. That bolstered bets that the European Central Bank will need to inject more stimulus to help the euro zone economy.
In late trading, the greenback shed 0.6 percent against the yen to 108.08 yen after reaching a six-year peak of 110.08 yen last Wednesday.
"The weakening technical picture ... would be accentuated on a move below 108.00-108.25 yen this week," said Christopher Vecchio, currency analyst at DailyFX, a unit of U.S. retail FX broker FXCM.
The euro zone single currency fell 0.6 percent to 136.86 yen , bringing its year-to-date decline to 5.5 percent. Earlier, the euro fell to 136.52 yen, the lowest since Sept. 8.
Against the dollar, the euro was little changed at $1.2657 , nearly 1.5 cents above the two-year low struck last week.
The euro zone's prospects remain dour. The International Monetary Fund warned there is about a 30 percent chance the region might fall into deflation this year as the group downgraded its global economic outlook.
The IMF also lowered its view on Japan but boosted its call on U.S. economic growth this year to 2.2 percent from 1.7 percent three months ago.
The dollar index, which measures the greenback's value against a basket of six major currencies, extended Monday's dramatic drop, which was its biggest one-day decline since January. The index fell 0.3 percent to 85.693 after rising to a four-year high on Friday.
(Reporting by Rochard Leong and Gertrude Chavez-Dreyfuss; Editing by Jonathan Oatis and James Dalgleish)