The dollar dropped to six-month lows against the yen for a second day running on Thursday as worries about the U.S. economy lingered despite a pullback in sky-high oil prices that helped it recover against the euro. While the sharp retreat in the cost of crude oil prompted short-term traders to lock in profits from the euro's 7-percent rally against the dollar over the past two months, traders said the resurgent yen had yet to run its course. "With the euro, traders had been able to buy it aggressively because authorities appeared relaxed about a higher euro. With the yen, it had been more difficult for speculators to go all out," said Taisuke Tanaka, currency strategist at Morgan Stanley. He was referring to the market's hesitation so far to test the resolve of Japanese authorities, who had spent a record 20 trillion yen ($188 billion) last year in market intervention to hold down the yen and 15 trillion yen in the first three months of this year.
The dollar fell as low as 106.07 yen by 0540 GMT, down from around 106.40 in late New York trading on Wednesday. It has fallen almost 4.8 percent in the past three weeks and is closing in on four-year lows around 103.40 set earlier this year. Tanaka at Morgan Stanley said that the dollar would likely remain under pressure for a while as doubts remained about whether U.S. economic growth could achieve a previous consensus of about 3.5 percent. He said uncertainty over next Tuesday's U.S. presidential election also tended to pressure the dollar, particularly against the yen.
OIL REPRIEVE
The euro stood at $1.2715/20 , marginally higher on the day but well below eight-month highs around $1.2840 set on Tuesday, which in turn was less than a cent off a record high of 1.2930 reached in February. Several euro zone officials have said a stronger euro could offset the inflationary impact of higher oil prices, but French Prime Minister Jean-Pierre Raffarin said on Thursday that he wanted to see a higher dollar and lower oil prices. Pressured by worries about the widening U.S. trade deficit and the outlook for the U.S. economy, the dollar has fallen about five percent against the euro over the past three weeks. A sharp downturn in oil prices gave some boost to the dollar but traders remained sceptical about the currency's outlook. Benchmark U.S. crude oil futures extended its retreat by more than $1 a barrel in electronic trading on Thursday, taking two-day losses to 7 percent. The contract had hit an all-time high of $55.67 a barrel just three days ago. "Oil did have a short-term effect (on exchange rates) but the trend is for a weaker dollar," said Jun Kitazawa, assistant vice president at the forex section at Brown Brothers Harriman. The dollar also found only very brief support from weaker than expected industrial output data for Japan. Industrial production fell 0.7 percent in September, much worse than market expectations for a gain of 0.5 percent. Elsewhere, the New Zealand dollar fell after the country's central bank raised its official cash rate by 25 basis points to 6.50 percent, as widely expected, but hinted that its tightening cycle may be over. "Given this, we believe that the current settings of monetary policy are now doing enough to ensure price stability," said Reserve Bank of New Zealand Governor Alan Bollard in a statement. The kiwi traded at 68.86/96 U.S. cents , compared with 69.26/34 just before the announcement.///