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Yen benefits as investor risk appetite wanes

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The yen rose strongly on Tuesday as a further drop in oil prices hit risk appetite and as cautious comments from U.S. Federal Reserve policymakers prompted a pullback in the dollar's recent rally.

Commodity currencies extended recent losses, with the Australian dollar setting a four-year low of $0.8223 and the Canadian dollar hitting a five-year trough of C$1.1501 versus its U.S. counterpart as Brent sank below $66 per barrel.

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Dennis Lockhart, head of the Atlanta Federal Reserve, said late on Monday that he was in no rush to drop the Fed's pledge to keep interest rates near zero for a "considerable time", while San Francisco Fed chief John Williams said the phrase was still appropriate.

Against the traditionally safe-haven yen, the greenback slid 0.8 percent to 119.78 yen, pulling further away from a seven-year high of 121.86 yen set on Monday. The Japanese currency also rose versus the euro, which shed 0.5 percent to around 147.93 yen.

"Currency markets are trading in a risk-off sentiment," said Neil Jones, head of FX hedge fund sales at Mizuho bank in London, adding that investors were booking profits on the dollar into the year-end after its strong performance in recent months.

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"People are cutting the higher yielding currencies which they've been funding through being short yen and that position is being reversed somewhat, which is manifesting itself in a much lower dollar/yen."

The U.S. dollar may retreat further versus the yen in the near term due to the potential for more position squaring in the wake of its recent rally, said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.

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"The size of volatility in the dollar's moves versus the yen has become quite stark," Murata said, adding that choppy trading conditions could persist toward the year-end.

The euro rose by 0.4 percent to $1.23620, moving further away from a 28-month low of $1.2247 hit on Monday as the dollar weakened across the board.

Against a basket of major currencies, the dollar fell 0.3 percent, having hit a five-year high on Monday.