The dollar dipped on Thursday after scoring its biggest daily gain for nearly two years against most major currencies the previous day as concerns about the U.S. and global economies triggered a wave of unwinding in short dollar positions.
But the greenback rose to the day's high of around 85.50 yen from a 15-year trough against the yen marked the day before, after market sources told Reuters the Bank of Japan checked exchange rates with banks earlier on Thursday.
The talk of the BOJ rate checking prompted players to cover short dollar positions, although bearish sentiment persists for the dollar, said an FX trader at a big Japanese brokerage.
The U.S. currency fell as low as 84.72 yen on trading platform EBS on Wednesday, when it took out option barriers around 85.00 yen and a November low of 84.82 yen. The currency's slide was fueled by a narrowing spread between U.S. and Japanese government bond yields.
Two-year Treasury yields fell to a fresh all-time low on Wednesday a day after the Federal Reserve announced a plan to reinvest the money from maturing mortgage bonds in government debt to help its economy.
The euro gained 0.4 percent to $1.2913 as some players bought back the currency after it dropped more than 2 percent against the dollar on Wednesday as investors reduced risky positions.
A rise in euro/yen also supported the single European currency against the dollar, traders said.
Against the Japanese yen, the euro was up 0.3 percent at 110.07 yen after hitting a one-month low of 109.24 yen in early Asian trade.
The dollar index, a gauge of the greenback's performance against six major currencies, was down 0.1 percent on the day at 82.202 .DXY, but well above its 200-day moving average, now at 80.898.
On Wednesday, the dollar index soared 2 percent for its biggest one day rise since October 2008.
The dollar index might have finally reversed its trend after steadily sliding in the past two months, traders said.
It now has immediate support around the 81.53-81.60 region. A rise beyond a July 21 high of 83.45 would confirm it has bottomed out.
Against the yen, the dollar was little changed from late U.S. trade at 85.35 yen in choppy and nervous trade. The pair returned below 85.00 yen, then received a boost from the Reuters report on the BOJ checking rates.
The dollar was also helped as Jiji news said on Thursday that Japanese Prime Minister Naoto Kan told his chief cabinet secretary that the yen's sudden gains are rough.
The yen's strength, especially against the dollar, has stirred worries that Japanese authorities could intervene to rein in gains in the Japanese currency.
A stronger yen is raising alarm among policymakers worried that it could undermine exporters that have led the economy out of the global downturn.
Increasing jitters over possible intervention are prompting players to book profits on the yen's rally, rather than holding onto yen longs for an extended period, although many still believe Japanese authorities will not intervene unless there is a leap of 3-yen in a day against the dollar, traders said.
Dollar bids that seem to be linked to short-covering in speculators' short dollar positions keep coming, helping the market absorb dollar offers, said Mitsuru Sahara, chief manager of FX derivatives trading at Bank of Tokyo-Mitsubishi UFJ.
A euro zone official told Reuters on Wednesday that European authorities would not welcome intervention by Japan and joint intervention by major central banks is not on the cards.
Traders said the dollar may find some support at the psychologically key 84.00 yen level and 83.50 yen, around its July 1995 low. The U.S. currency struck an all-time low below 80 yen in April 1995.
(Additional contribution by Reuters analyst Krishna Kumar in Sydney and Masayuki Kitano in Tokyo; Editing by Joseph Radford)