Dovish talk deflates euro, yen enjoys rare breather
SYDNEY (Reuters) - The euro recoiled from a four-year high against the yen on Tuesday and retreated on the dollar as dovish comments from European Central bank officials deflated the high-flying currency.
The euro slipped to 137.22 yen from a peak of 137.98, and dipped to $1.3520 from Monday's high of $1.3561.
The moves were a small setback for the common currency, which has been recovering strongly after last Wednesday's steep drop on a media report the ECB was actively considering cutting one of its key interest rates to negative.
ECB Governing Council member Christian Noyer said on Monday interest rates have to remain low for an extended period and might go even lower if needed.
Echoing the dovish tone, Governing Council member Ardo Hansson was quoted as saying the ECB still has room to cut rates.
Analysts said markets were keen to see if the ECB would cut its deposit rate to negative.
"Any hints on the possibility of a negative deposit rate are worth watching particularly closely after last week's newswire reports suggested this was an option under consideration - probably a more palatable tool than QE for the Governing Council," analysts at BNP Paribas wrote in a note to clients.
Softness in the euro saw the dollar index .DXY drift up to 80.859, pulling up from Monday's session low of 80.677.
Overall, trading was subdued in a U.S.-holiday shortened week and ahead of a rush of U.S. data before the Thanksgiving day holiday on Thursday.
U.S. data on Monday painted a mixed picture on the world's biggest economy with contracts to buy previously owned homes falling to a 10-month low, while services sector activity rebounded.
Against this backdrop, the dollar trimmed gains on the yen to 101.52, having hit a six-month high around 101.91. Still, it was creeping ever closer to its 2013 peak of 103.74 set in May.
The yen has been the market's funding currency of choice for carry trades, given the Bank of Japan is the most committed to maintaining ultra-loose monetary policy among major central banks.
While Australia's monetary policy is nowhere near as stimulatory as those in the major economies, the country's central bank has been doing its best to talk down the local currency.
The Aussie last stood at $0.9177, having plumbed a fresh three-month trough of $0.9120 overnight. It has slid more than 6 percent from a recent peak of $0.9758 set in October.
RBA Deputy Governor Philip Lowe said on Tuesday he expected to see the Australian dollar lower over time and reiterated that the central bank would not rule direct intervention in or out.
Lowe, though, said the threshold for intervention was high.
(Editing by Richard Pullin)
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