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NEW YORK (Reuters) - The U.S. dollar and the yen fell against the euro on Tuesday as a stock market rebound reduced demand for safe havens.
Shares on Wall Street rose sharply in the last hour of trading after Monday's sell-off. The foreign-exchange market has closely eyed equity performance for direction in recent weeks, with rising stocks boosting risk appetite and hurting demand for the U.S. and Japanese currencies.
Overall, moves in major currencies were modest, with investors cautious ahead of monetary policy decisions from the European Central Bank and the Bank of England later in the week. Both are expected to slash rates aggressively to spur growth.
"The market is in a little bit of a wait-and-see mode," said Stephen Malyon, senior currency strategist at Scotia Capital in Toronto. "We have a lot of event risk later this week with various central bank decisions and (U.S.) nonfarm payrolls on Friday.
In late trading in New York, the euro rose 0.7 percent against the dollar to $1.2714 and gained 0.9 percent versus the yen to 118.66.
The dollar was up 0.2 percent against the yen at 93.34. It fell as low as 92.64 yen earlier, the lowest since October 28, according to Reuters data.
The dollar and the yen have found support in recent months as investors reduced exposure to riskier assets. U.S.-based investors have also moved funds back to their domestic market, further boosting the greenback.
Despite Tuesday's pullback, those factors are set to continue to benefit the two currencies, analysts said.
"We're likely to remain in trading ranges with perhaps a bit of a bias for further strength in both of those currencies," Malyon said. "We're going to have a pretty nervous financial market and news on the economy is likely to remain quite downbeat. That's going to keep some pressure on equities."
An unexpectedly bold 100 basis-point rate cut from the Reserve Bank of Australia kept the Australian dollar under pressure early in the trading day, although the currency recovered with the rise in stocks.
The Australian dollar rose 0.8 percent versus the greenback to US$0.6451.
The RBA's move raised expectations other central banks may follow suit with aggressive easing in Britain and the euro zone to revive their flagging economies. Such cuts could lend some further support to the dollar by dimming the appeal of those higher-yielding currencies.
The European Central Bank is seen cutting rates on Thursday by at least 50 basis points, from 3.25 percent, and possibly more.
Currency strategists at Citigroup cautioned that with investors already discounting a sharp drop in euro zone rates, the potential for disappointment is rising. The firm recommended investors short euro positions going into the ECB decision. A short position is a bet that prices will fall.
"The build-up of expectations for more aggressive action may be contributing to the somewhat more positive tone from 'risky' assets and euro today, but this latest in a series of spurts is no more sustainable than the last," the firm wrote in a research note.
Sterling rose 0.2 percent to $1.4905 despite the view that the Bank of England will slash rates by as much as 100 basis points on Thursday, one month after chopping them by 150 basis points, to 3.0 percent.
Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Dan Grebler