The U.S. dollar fell broadly on Friday after U.S. President Barack Obama proposed new rules for banks that some investors said would squeeze profits but the yen later pared gains against the greenback as risk aversion abated.
Mr. Obama set out new rules on Thursday to restrict some banks' most lucrative operations, blaming them for helping to cause the financial crisis. His remarks sent the dollar lower as investors assessed the implications for the greenback and U.S. assets.
The yen jumped in Asian trade as investors became more averse to risk, but later cut much of its gains, as they took the view the plan would not derail global economic recovery.
The retreat from risk aversion also pushed higher-yielding, commodity-linked Australian and New Zealand dollars posted solid gains against the U.S. dollar, reversing earlier falls.
"People were initially slightly shocked by the Obama plan and by the implications of what he was suggesting, but there is a question of how quickly it will be implemented," said Chris Turner, head of FX strategy at ING in London.
"It also shouldn't derail the Asian-led global recovery, which is good for commodity-linked currencies."
He added, however, that investors were wary about what the plan might mean for bank lending and confidence, especially when there were doubts over the strength of the U.S. recovery.
By 1110 GMT, the dollar index fell 0.2 per cent to 78.134, below its 200-day moving average at 78.48, which was seen as a zone of short-term resistance.
The dollar was down 0.2 per cent against the yen at ¥90.31, off an earlier five-week low of ¥89.78 hit on the EBS trading system. Support was seen at ¥88.80/90, an area it bounced from in mid-December.
The euro rose 0.4 per cent against the dollar to $1.4140. Against the yen, it gained 0.3 per cent to ¥127.69 rebounding after breaching a long-held chart support at 127.00 that pushed it to a nine-month low of ¥126.55.
"The Greece (fiscal health) concerns are still there for the euro, but much of the negative news is already priced in," said Marcus Hettinger, Credit Suisse global FX strategist in Zurich.
A senior trader at a European bank in Tokyo said ¥127.00 was a critical level for the euro, and a close below there this week would signal further falls.
The Australian dollar rose 0.7 per cent to $0.9065, having earlier dipped to its lowest in almost a month at $0.8983 when it fell on risk aversion in response to the Mr. Obama plans.
This prompted investors to buy it back at lower levels, with some traders saying the move had been overdone.
The New Zealand dollar rose 0.7 per cent to $0.7150.
Analysts said the market was still trying to figure out how to play the dollar in response to Mr. Obama's proposals, which caused U.S. stocks to suffer their worst one-day percentage drop since October.
"Measures of this nature would limit the liquidity of the U.S. financial markets, thus affecting the attractiveness of the dollar for investors," Commerzbank analysts said in a note.
"We should really question why the plans have not put more pressure on the dollar - the reason is probably the uncertainty surrounding the actual implementation of such measures," they said.
Others, however, said the greenback may be bought, based on the view that the plans will heighten risk aversion.