Dollar hits multi-week low vs. yen, euro

Late rally on Wall Street boosts risk aversion, as thin trading conditions exacerbate moves.

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NEW YORK (Reuters) -- The dollar fell to multi-week low against the yen and euro Thursday as a recovery in U.S. stocks and the price of oil quelled some worries about the global economy.

Earlier, a slide in Chinese and European stocks stoked caution about the global outlook, prompting investors to buy the yen as a safe haven and sell perceived higher-risk currencies such as the euro.

But a midafternoon rebound that took Wall Street stocks back to levels last seen in October boosted the euro to a three-week high against the dollar, though traders said low volume was responsible for the ferocity of the reversal.

"It's a late August market. People were long dollars and got squeezed when U.S. stocks recovered," said Brian Dolan, chief strategist at in Bedminster, N.J.

Those moves, he said, camouflaged a growing sense among investors that recent asset price gains and optimism about a world recovery have been overdone.

"Risk assets are not rallying as they have, and there's a sense of lethargy setting in that certainly suggests enthusiasm is waning," he said.

Dolan and other said that anxiety was partly responsible for the yen's gains. The dollar fell 0.8% to ¥93.45, just above a five-week low touched earlier, while sterling also hit its lowest level against the yen since July.

When risk aversion rises, investors often buy the Japanese and U.S. currencies, either as safe havens or because they needed to exit trades financed with cheap yen or dollars.

Some in the market said the yen was also supported by a report that China's sovereign wealth fund was exploring investment in Japan.

The euro rose 0.8% to $1.4367, surging higher as a U.S. stock rebound triggered automatic buy orders against the dollar. It had fallen as low as $1.4220 earlier. It was down 0.1% at ¥134.13, but well off a session low of ¥132.94.

The pound also erased earlier losses to rise 0.3% to $1.6286 . The Australian dollar rose 1.6 % to $0.8403 while the U.S. dollar fell 1.3 % against its Canadian counterpart to C$1.0839.

Investors remain cautious

A revised report showing slower-than-expected contraction in the U.S. economy in the April-to-June period and a decline in weekly jobless claims soothed some nerves. But analysts said the data wasn't as rosy as it may have first appeared.

"I just think that the market is getting ahead of itself in terms of pricing in an improvement in the fundamental outlook," said Win Thin, senior currency strategist at Brown Brothers Harriman in New York.

He said that while data showed the number of workers on long-term unemployment fell to its lowest level since April, the "exhaustion rate" -- the percentage of unemployed workers who couldn't find a job before drawing their last benefit check -- rose to 50.7% in July, the highest since 1972.

Also troubling was a report from the Federal Deposit Insurance Corp saying the number of problem banks and thrifts rose sharply to 416 in the second quarter. The FDIC also said the financial industry reported a $3.7 billion loss in the second quarter. To top of page

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