Dollar retreats as investors turn risk-averse; eyes on ECB

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The yen held its gains against the dollar on Thursday after weak manufacturing surveys from around the globe and an Ebola health scare in the United States sent investors in search of safer assets.

The European Central Bank holds its monthly policy meeting later in the day, after which ECB President Mario Draghi is expected to give further details of its plan to buy asset-backed debt and covered bonds.

The asset purchase programme was announced in June as part of measures the bank hopes will boost the flagging euro zone economy and ward off the threat of deflation.

The euro was flat on the day against the dollar at $1.2625 , not far off a two-year trough of $1.2572 hit on Tuesday.

The ECB is expected to leave interest rates unchanged after a surprise cut last month. Many in the markets expect Draghi to give a size for the ABS purchase programme, although some traders cited reported comments by ECB Vice President Vitor Constancio suggesting a precise figure would not be forthcoming.

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"Everyone is positioned for further details, and the market could be disappointed if there isn't a figure," Morgan Stanley's head of European currency strategy Ian Stannard said.

"That could lead to a post-ECB rebound for the euro if there are no further measures, ... such as an extension into other asset classes, announced."

A Reuters poll on Monday showed money market traders on average expect the ECB to buy a total of 200 billion euros of asset-backed securities (ABS) and covered bonds over a year.

Expectations that the ECB will be forced to buy sovereign bonds as part of a broad-based quantitative easing scheme have risen in recent months as the bloc tips towards deflation.

Dollar down

The dollar index fell about 0.2 percent to 85.776, pulling away from a four-year high of 86.218 touched on Tuesday as investors took profits after the greenback's recent rally. The index has notched up a record-breaking 11 straight weeks of gains and posted the best quarterly rise in six years.

Against the yen, the dollar retreated 0.1 percent to 108.81 yen from the previous session's six-year peak of 110.09, while the euro fell to a three-week low against the Japanese currency of 137.26 yen.

"Some investors, including some hedge funds, are using this as an opportunity to take profits" after the dollar's rally against the yen, said Kaneo Ogino, director at Global-info Co in Tokyo, a foreign exchange research firm.

But investors including Japanese importers were buying on dips, supporting the dollar around 108.50 yen, he said.

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Investors warmed to the Japanese currency after surveys showed German factory activity shrank for the first time in 15 months, China's manufacturing sector barely grew, and the United States slowed more than expected.

The reports cast a pall on investor confidence, knocking global stocks lower and boosting demand for safe-havens such as the yen and government bonds.

U.S. Treasury yields fell sharply as a result, with the 10-year yield sliding below 2.40 percent to its lowest in nearly a month. That in turn undermined the allure of the greenback against a host of currencies.

The Australian dollar managed to bounce back above 87 U.S. cents, from an eight-month low of $0.8663. It came within a hair's breadth of its 2014 trough of $0.8660 on Wednesday after local retail sales data fell short of expectations.

Investors are expected to remain cautious ahead of the closely watched U.S. payrolls report on Friday, and are also warily monitoring developments in Hong Kong's ongoing pro-democracy protests.