-  US dollar hits 8-1/2-month low near 88 yen, then eases

-  Dollar rises against euro after recent sell-off

-  Markets await BOE, ECB rate meetings on Thursday

The dollar gained against the euro and a basket of major currencies on Wednesday as optimism following Australia's interest rate hike fizzled out and traders said the greenback's recent decline was overdone.

Investors paused in selling the dollar after pushing it sharply lower recently as an improvement in risk appetite diminished safe-haven demand. U.S. and European stock markets were unable to hold onto gains after rallying on Tuesday as the Australian interest rate hike bolstered hopes the global economy was recovering.

Across asset classes we're just seeing some giveback after yesterday's big moves, said Camilla Sutton, currency strategist at Scotia Capital in Toronto.

Sutton added that while there is always concern that the greenback is oversold, trading activity tells us that so far any real bounce in the U.S. dollar has been used as a selling opportunity.

The dollar also eased back from a eight-and-a-half-month low against the yen that was hit after Japanese Finance Minister Hirohisa Fujii said he was quietly watching currency moves and that the currency pair was driven by dollar weakness rather than yen strength.

Markets took the comments as a sign that the yen's trading level is not yet a worry for Japan.

In midafternoon trading, the dollar was off 0.2 percent at 88.56 yen , after earlier trading as low as 88.01 yen, according to electronic trading platform EBS, its lowest level since late January.

The yen's inability to appreciate beyond 88 yen per dollar, where margin calls and options barriers lurk, prompted a recovery in the U.S. currency, traders said. A sustained fall below that level could take the dollar down to 87.10 yen. The dollar fell to this level in January for the first time since mid-1995.


The euro fell 0.3 percent to $1.4671 . The ICE Futures U.S. dollar index, which tracks the greenback against a basket of six major currencies, was up 0.2 percent at 76.482 , holding above a 13-month low of 75.827 hit last month.

There was a knee-jerk reaction (Tuesday) after the surprise RBA rate hike in Australia. It fueled general optimism that risk appetite is improving, said Samarjit Shankar, managing director of global FX strategy at BNY Mellon in Boston. We're now seeing a bit of a pullback in the move and the dollar is recovering a little bit.

Fujii was earlier quoted in an interview with The Wall Street Journal, published on Wednesday, saying that the current level of the yen was consistent with acceptable market activity. [ID:nT268920]

Comments from the new minister have been in the spotlight in recent weeks as traders try to assess the likelihood the government will intervene in the currency market.

I suspect the market wants to see how far it can push the new Japanese administration, who have been sending mixed messages on its attitude toward yen strength, said Daragh Maher, deputy head of forex strategy at Calyon.

There is a fairly low probability the Bank of Japan will intervene in the foreign exchange market in the very near term because the yen is seen weakening against the dollar over the coming year, a Reuters poll showed on Wednesday.

Investors looked ahead to the European Central Bank and the Bank of England policy meetings on Thursday. With both expected to hold rates steady, the focus will be on whether they offer any hints on the outlook for quantitative easing.

In other trading, the Australian dollar rose to US$0.8951, its highest since early August 2008, before pulling back to trade 0.3 percent lower at US$0.8888.