The dollar slid 1.7 percent against the yen on Monday, the biggest one-day move since late February, after weaker-than-expected China and U.S. data, a selloff in gold and the explosions in Boston prompted investors to exit riskier investments funded by cheap borrowing in the yen.
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"Really a retracement across the board of a lot of the moves that we saw yesterday," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange. "Fundamentals right now appear to be taking a back seat to a lot of position and order-driven flows."
The dollar extended gains versus the yen after data showed U.S. consumer prices fell in March for the first time in four months, while the housing market recovery appeared to be losing momentum.
A sharp rally in the dollar against the yen has stalled in recent sessions as investors booked profits ahead of significant resistance and option barriers at the psychological 100-yen-per-dollar level. But analysts said the weakening yen trend remained intact after the Bank of Japan's aggressive monetary easing earlier this month.
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"The fundamental picture still remains supportive of a weaker yen going forward as the recent rebound over the last couple of days is unlikely to prove sustainable," said Lee Hardman, currency economist at BTMU, which forecasts the dollar at 109 yen in 12 months.
Investors will also closely monitor gold prices and another plunge could renew demand for the most liquid currencies such as the dollar and yen.
The euro rallied 2 percent to 128.65 yen, having hit a session peak of 128.99 yen, according to Reuters data.
Against the dollar, the euro rose 1.2 percent to $1.3196, with central bank buying reported. It hit a session peak of $1.3189, the strongest since Feb. 25, after breaking resistance around $1.3140. Further resistance is seen in the $1.3270/1.3300 area.
Traders said investors would need to see a clearer sign that commodity prices are stabilizing before their appetite for riskier assets returns.
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Robert Rennie, head of currency strategy at Westpac said in a note that Japanese investors in gold may have been big sellers after the precious metal hit a record high in yen-denominated terms last week.
The Australian dollar rose 0.8 percent to $1.0389, while the New Zealand dollar gained 1.2 percent to $0.8505. Both saw steep losses in the previous session.