The dollar weakened on Friday, crawling towards a seven-month trough against the yen after a series of U.S. data this week underscored a slackening in the economy's recovery.
Market players closely watched whether the dollar could hold above its July 1 low of 86.96, its lowest since early December, as a fall below that level could boost the possibility of the greenback dropping to 84.82 yen, a 14-year low reached last November.
Last December the Bank of Japan called an emergency meeting soon after the dollar slid to the 14-year tough, and decided to pump 10 trln yen ($114.5 bln) in three-month funds into the banking system.
The yen's latest rise has brought it to levels that could cause pain to Japanese exporters if its gains are sustained, with the BOJ's tankan survey showing the average forecast for the dollar/yen rate in the year to next March among large manufacturers is 90.18 yen.
Market players said there was talk of stop-loss dollar offers at levels below 87.00 yen.
The dollar slid 0.5% to 87.02 yen after falling as low as 86.97 yen. Some speculative players who are betting further losses in the greenback would be limited against the yen bought back dollars below 87.00 yen, traders said.
U.S. data this week, including retail sales and producer price numbers have been soft, raising questions about the sustainability of a U.S. recovery..
The euro hovered near a two-month peak of $1.2955 hit on trading platform EBS on Thursday, when it jumped 1.6% against the greenback.
Traders said investors were shifting funds away from the dollar and towards the euro due to a combination of factors including receding concerns about sovereign debt problems in the euro zone, worries about a U.S. recovery and strong U.S. earnings results. Lower U.S Treasury yields also undermined the greenback..
"Given the dollar's weakness, it won't be surprising to see the euro rising to $1.3000, although the euro could tread water in the near-term after yesterday's sharp rally," said Minoru Shioiri, chief manager of forex trading at Mitsubishi UFJ Morgan Stanley Securities.
The euro dipped 0.2% to $1.2916, giving back some of its 1.6% gain from Thursday, when it scaled a two-month high of $1.2955 on trading platform EBS.
Thursday's rally lifted the euro above the daily Ichimoku cloud, meaning it has broken through a major resistance zone and may have more room to rise. In another positive sign, the euro rose above its 100-day moving average on Thursday for the first time since December.
One possible upside target is $1.3125, a 38.2% Fibonacci retracement of the euro's drop from November to June.
EURO'S RISE MAY SLOW
Although technical charts suggest the euro is still trending higher, there were some indications that its rise may lose steam for now.
A senior trader for a major Japanese bank said many euro option barriers were likely to lie at levels near $1.3000, adding that the pace of the euro's rise may slow in the near-term.
The euro's 14-day relative strength index (RSI) rose above 70 on Thursday, showing that the euro had entered overbought territory. That was also the highest since September 2009. The euro's RSI was near 68 on Friday, still near overbought territory.
Earlier this week, minutes of the Federal Reserve's latest meeting revealed policymakers may need to do more to boost the economy if a sputtering recovery slows further.
That was in sharp contrast to the euro's fortunes. The single currency has risen more than 8 percent after smooth government debt auctions in Greece, Portugal and Spain eased concerns about the euro zone's sovereign debt problems.
The dollar index dipped 0.1% to 82.443. Earlier this month the dollar index broke below the daily Ichimoku cloud, suggesting more losses may be in store.
The New Zealand dollar dropped after inflation data was weaker than expectations..
The kiwi fell 1% on the day to $0.7201, having stood at around $0.7270 before the data.
