Dollar Recovers Against Yen After Sharp Sell-Off

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The dollar recovered against the yen on Tuesday as investors sought to take advantage of the previous day's cheapening to buy back the U.S. currency, while strength in Japanese stocks curbed the need to hold yen.

A day after falling to a four-week low versus the yen, the greenback found further support from a Reuters report saying the Japanese government would urge public pension funds controlling a pool of more than $2 trillion to boost investments in equities and overseas assets.

The Nikkei index closed 2 percent higher, led by a 6 percent gain in financials. Japanese government bonds, meanwhile, sold off and the 10-year yield rose 6 basis points to around 0.88 percent.

"There was a squeeze on long dollar positions, but we know that wasn't going to last because the long-term bullish outlook on the dollar is well entrenched," said Vassili Serebriakov, currency strategist at BNP Paribas in New York.

The dollar was last up 0.4 percent at 99.94 yen, with traders citing option expirations at 100 yen that were likely to keep the pair pinned around that level. The greenback fell as low as 98.86 yen on Monday after a survey showed U.S. factory activity fell in May to its lowest since June 2009.

(Read More: Is Dollar-Yen's Slide Below 100 Just the Start?)

On short-term technical charts, however, signals suggested the dollar's rally against the yen was temporary.

Camilla Sutton, chief currency strategist at ScotiaBank in Toronto, said the 50-day moving average around 99.12 yen was providing support, and a close below this level would accelerate selling. But a close above Monday's opening price of 100.57 yen would remove some of the downside pressure, she added.

The dollar index, a measure of the greenback's value against six major currencies, last traded 0.2 percent higher at 82.782.

A dollar had slipped against a broad swath of currencies on Monday as a weak U.S. manufacturing survey dimmed prospects of the Federal Reserve scaling back monetary easing soon, even though two Fed policymakers said the U.S. central bank could taper its stimulus in the coming months if data improved.

(Read More: Ease Off Gas Rather Than Hit Brakes, Says Fed's George)

With the Fed pledging to maintain stimulus until the labor market improves, U.S. jobs numbers due on Friday will be under intense scrutiny.

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U.S. job growth probably picked up only slightly in May, suggesting the economy is still in a rut and not ready for the Federal Reserve to dial back its monetary support.

Employment outside the farming sector likely increased by a lackluster 170,000 jobs, according to a Reuters survey of economists. That would be just above the 165,000 created in April. A disappointing number could trim long dollar bets while better-than-expected data would give the U.S. currency a boost.

The direction of the dollar versus the yen will likely be swayed by how U.S. Treasury securities react to the jobs data.

The euro was last up 0.1 percent at $1.3084, off a peak of $1.3107 reached on Monday, which was its highest since May 9. Euro zone producer prices fell further in April, marking the biggest month-on-month decrease in nearly four years and keeping alive chances of more interest rate cuts by the European Central Bank.

The week's big euro focus will be the ECB's monthly meeting on Thursday, at which officials are expected to hold interest rates steady. But a post-meeting press conference by ECB President Mario Draghi will come under scrutiny for clues on the prospects of a rate cut.

"Generally speaking, the euro looks set to continue to outperform this week, especially into the European Central Bank policy meeting on Thursday," said Christopher Vecchio, currency analyst at DailyFX in New York.

"There has been growing chatter that the ECB could implement negative rates in order to help stoke the region's depressed and increasingly frozen credit flow, but that seems unlikely to me right now," he said.

The Australian dollar was last down 1.3 percent at US$0.9642 after the Reserve Bank of Australia held rates at 2.75 percent and governor Glenn Stevens said easing was still on the table.

(Read More: Australia Central Bank Keeps Rates Unchanged, as Expected)