SYDNEY The dollar crumbled to seven-week lows on Thursday after the yen ploughed through major resistance levels in a stop-loss frenzy, while sterling joined the fight as the market brought forward the day when UK rates might start to rise.
The dollar index .DXY broke down to 81.229, bringing its losses to 4 percent in just a month and questioning the view that this was just a fleeting correction in a long-term uptrend.
"The fact that the USD cannot rally decisively off this support area of 81.50/30 is concerning us and suggesting that we may be about to see a renewed period of USD weakness," says CitiFX Technicals.
Dealers were now bracing for trade data from China and Australian jobs data, which could trouble the Aussie currency, while the Bank of Japan is expected to press ahead with its stimulus plans at its latest policy meeting.
The yen again led the charge against the U.S. dollar, reaching a seven-week peak of 96.30 before pausing at 96.48 in early Asian trade.
The loss of support at both 97.50 and 96.75 was taken as a bearish blow and pointed to a push toward 95.50/96.00, an important chart area that contained major retracement levels.
The euro also snapped support around 129.30 yen to reach a one-month trough at 128.39.
Dealers said the yen has shown a strong inverse correlation to Japanese shares in recent weeks and speculators were taking recent sharp falls in the Nikkei .N225 as a signal to buy the currency. The index shed 4 percent on Wednesday alone.
There was also talk Japanese investors could convert capital inflows from interest payments on the country's massive U.S. Treasury debt holdings ahead of a mid-August holiday.
Also breaking higher was sterling as investors brought forward expectations of when the Bank of England will raise rates after a news conference by the central bank's head.
BoE Governor Mark Carney said future interest rate rises in the UK would not happen until unemployment fell to 7 percent, something seen unlikely for at least three years. But markets concluded that given a slew of recent upbeat data, unemployment could come down faster.
After the bank's report, overnight indexed swaps priced in a 90 percent chance of a rate hike in three years' time, and some chance of a hike as early as 2015.
The pound first fell as far as $1.5205 on the news, only to speed up to $1.5490 when the market reconsidered the outlook for rates.
Traders were now looking ahead to Chinese trade figures for July which are expected to show some bounce back after a surprise tumble in June.
Any weakness will only fuel fears of a hard landing and punish Asian stocks and commodity currencies such as the Australian dollar.
The Aussie also has a home-grown challenge in the shape of employment figures for July. Analysts look for a rise of around 5,000 in jobs but also a tick up in the unemployment rate to 5.8 percent.
Again a weak report would add to speculation the Reserve Bank of Australia (RBA) might have to cut rates again even after this week's easing to 2.5 percent.
(Editing by Shri Navaratnam)