The yen softened on Friday after Tokyo importers took advantage of its broad rally the day before, while risk currencies such as the Australian dollar were poised to end the week sharply lower on fresh concern about the health of the global economy.
Manufacturing shrank for a fifth month in China, while factory activity in Germany and France, Europe's two biggest economies, suffered big and unexpected falls, data showed on Thursday, bolstering the yen and sending growth currencies down.
But on Friday the Japanese unit's underlying weakness was reinforced by selling by Japan importers, whose purchases of fossil fuels have surged as most nuclear reactors in the country were taken offline after the Fukushima disaster last year.
The yen fell 0.4% to 82.85, slowly inching back towards this year's low of 84.19 hit earlier in March. Its rise on Thursday stalled ahead of resistance at the 23.6% retracement of its recent fall at 82.28.
The dollar's staggering rally on the yen lost impetus as investors booked profit on the greenback and as Japan posted a surprise trade surplus on Thursday.
Other currencies also recouped some of their overnight losses on the yen despite Asian stock markets turning red, suggesting investors are awaiting more definite signs of a global slowdown before shunning riskier assets more aggressively.
The alarm lights are flashing as Spanish bond yields spiked above 5.5% for the first time since early January, with investors continuing to worry after Spain proposed to cut the budget deficit, which exceeded targets in 2011, by less than agreed with the EU for this year.
While a slowdown in Europe and China had been expected, investors were unnerved by the drop in new orders in both regions, which fuelled concerns that an unexpectedly severe downturn could snuff out the global recovery.
The euro stayed surprisingly resilient against the greenback, bouncing off a low of $1.3133 to $1.3195 . But some analysts said the single currency could still fall against the dollar, partly due to the recovery in the U.S. economy.
The recent flow of encouraging U.S. data has driven U.S. Treasury yields sharply higher, making the dollar less attractive as a funding currency for carry trades.
Traders said yields were prone to pullbacks like the one seen on Thursday, but should rise further if the U.S. recovery strengthened, providing support for the greenback in the months to come.
"We see scope for EURUSD to trade lower in coming weeks, based on the risk that Treasury yields will overshoot to the upside relative to what we regard as realistic Fed policy expectations," BNP Paribas analysts wrote in a client note.
"We also see potential for the re-emergence of some euro zone stress as we head into April and as the French and Greek elections draw near. We are targeting 1.28 in the coming weeks."
Growth-linked currencies nursed heavy losses against the dollar with the Australian dollar hovering near lows not seen since mid-January at $1.0377. It is on track to end the week down almost 2%.
After a rush of manufacturing surveys on Thursday, the focus was again back on Europe, with Italian retail sales and French business climate due later in the day, followed by U.S. new home sales to round off the week.
