The dollar fell against most major currencies on Tuesday, resuming a long-term decline after a respite the previous session as investors expected further signs of housing weakness and sluggish consumer spending that could hurt U.S. economic growth.
The dollar was higher against the yen, however, as the Japanese currency fell from an 18-month high against the dollar after comments from Japan's prime minister abruptly ended the unwinding of carry trades that had pushed the unit higher in recent days.
Japanese Prime Minister Yasuo Fukuda told the Financial Times that the yen was appreciating too fast and speculators needed to be careful to avoid the possibility of intervention. Dealers had previously been rapidly unwinding risky trades, increasing volatility in the currency and equity markets.
The low-yielding yen had surged in recent days as renewed fears that credit-related problems could spread to the wider U.S. economy sapped risk appetite among investors, prompting them to buy back yen they had sold to fund purchases of higher-return currencies in carry trades.
For the moment, the rapid ratcheting down of risk appeared to be over and the market continued to maintain bets against dollar strength, though they have shrunk since last week.
After Japan's Prime Minister stated that the yen was appreciating 'too fast' and speculators need to 'be careful,' the U.S. dollar has risen against the yen and yen carry has rebounded sharply, Andrew Busch, global FX strategist at BMO Capital Markets in Chicago, wrote in a note to clients.
The euro edged up 0.5 percent from late Monday, to $1.4601, lifted partly by a 1.8 percent rise against the yen to 161.95 yen.
The euro was within a few cents of last week's record high of $1.4752, according to Reuters data. The New York Board of Trade's dollar index closed down 0.2 percent to 75.881 on Tuesday.
The dollar was up 1.3 percent at 110.90 yen after falling as low as 109.10 yen on Monday.
There's still a huge proportion of the market that is short the dollar and that seems to be the way to go, said Robert Houck, a currency dealer with Wells Fargo in Minneapolis. When it isn't, it's going to unwind in dramatic fashion.
Worries about the U.S. economy continued to drive trade.
The dollar extended gains against the yen in afternoon trade as the National Association of Realtors reported its September U.S. pending home sales index unexpectedly rose.
On Wednesday, the U.S. government will release its October retail sales report which will be scrutinized for any signs weakness in the housing sector has hurt consumer spending.
U.S. interest rate futures still fully expect the Federal Reserve to cut benchmark rates another quarter percentage point to 4.25 percent next month.
Though comments from Japan's Fukuda ended up providing a bit of shock therapy to get the market back to familiar trends of dollar weakness and of strength in commodity-related currencies, risk-taking was tentative.
Risk reduction preceding any visible sign of slowdown in emerging markets or the commodity bloc is reflecting investor unease over growth prospects in general, said UBS currency strategists in a note.
The Australian dollar jumped 2.2 percent against the greenback to $0.8895 after tumbling 3.9 percent on Monday. The New Zealand dollar rose 1.8 percent to $0.7591. It was the biggest one-day percentage gain for both the aussie and the kiwi against the dollar since mid September, according to Reuters data.
The comeback in the Canadian dollar was not as definitive after posting its largest one-day decline since 1971 on Monday. The U.S. dollar fell 1 percent to C$0.9643.
(Reporting by Nick Olivari and Kevin Plumberg; Editing by James Dalgleish)