The dollar retreated against the yen while other high-yielding currencies tumbled on Thursday, as investors backed out of riskier assets on renewed worries about troubles in the global financial sector.

The dollar extended losses against the Japanese currency after a key U.S. survey showed manufacturing activity declined in October. That enhanced chances of another U.S. interest rate cut by the Federal Reserve in December.

On Wednesday, the Fed trimmed benchmark interest rates by a quarter percentage point to 4.5 percent.

It's a pure risk-aversion play today, with carry liquidation going on. With stocks down sharply, that's giving the yen strength and pulling everything else down against the dollar, said Boris Schlossberg, senior currency strategist, at in New York.

Investors use the low-yielding yen to buy higher-yielding currencies and other assets such as the Australian and New Zealand dollars in carry trades.

The dollar fell 0.6 percent against the yen to 114.61, off the day's highs at 115.92. The euro fell more than 1 percent to 165.14 yen.

The euro also dropped about half a percent against the dollar to $1.4405 a day after it hit a record peak above $1.45, according to Reuters data.

The Australian dollar fell 1.9 percent versus the greenback to US$0.9147. On Wednesday, it surged to a 23-year peak above US$0.93, according to Reuters data. It was on track for its biggest one-day decline since late August.

Against the yen, the Aussie currency dropped 2.3 percent to 104.91.

It certainly seems apparent from the sell-off in global equity markets that there is a reduction in risk appetite, said Michael Woolfolk, senior currency strategist at Bank of New York Mellon.

U.S. stocks posted sharp losses on Thursday after a downgrade of Citigroup (C.N: Quote, Profile, Research) by a brokerage.

Following the data, markets have priced in a more than 60 percent perceived chance the Fed will cut rates again in December, up from about 38 percent earlier in the session.

(Additional reporting by Steven C. Johnson and Walker Simon)