By Patrick Graham
LONDON (Reuters) - The yen and the euro both retreated from long-term highs against the dollar on Wednesday as markets looked to a series of U.S. jobs releases due by the end of the week for fresh direction.
Measuring by the trade-weighted index used by the European Central Bank
The bigger debate for the moment is the yen, up 14 percent against the dollar since mid-December, and the chances of either outright intervention or, at some stage, far more aggressive policy action from the Bank of Japan to weaken it.
A U.S. Treasury report on Friday sent a warning shot by saying that "persistent one-sided" intervention to weaken the currency could see countries with big trade surpluses classified as currency manipulators and demand action.
No one expects it to come to that. But the report was taken as another sign that U.S. officials are not comfortable with more dollar gains. The greenback hit an almost 19-month low of 105.55 yen overnight, having hit its weakest against the euro since last August on Tuesday.
Against that were comments by San Francisco Federal Reserve President John Williams that he would vote for a rise in interest rates in June if economic growth was on track with his forecast and jobs gains continue.
"There is the feeling that the activity by the U.S. Treasury could have taken us into oversold territory with respect to the dollar," Rabobank strategist Jane Foley said.
"We have ADP jobs numbers today and then obviously we are thinking about payrolls on Friday. If they are strong again, does that push expectations for a rate rise higher again, does it create more dollar strength? It will be interesting to see."
The dollar gained 0.2 percent to 106.75 yen
The gains against the yen came in thin market conditions, with Japanese markets closed on Wednesday and Thursday for public holidays.
The yen last week saw its biggest weekly gain since 2008 - more than 5 percent against the dollar - as the Bank of Japan held off from expanding its stimulus.
Position squaring ahead of U.S. jobs data later in the week is probably supporting the dollar against the yen for now, said Stephen Innes, senior trader for FX broker OANDA in Singapore.
"There's a huge, huge short position built into dollar/yen right now," Innes said.
Goldman Sachs (NYSE:GS) strategists called the yen higher in the short term but said that would only put more pressure on policymakers to take aggressive action later that would weaken it.
"There is little doubt in our minds that the dollar will keep falling against the yen in the near term, until (BOJ) Governor Kuroda is forced to respond with overwhelming force," they said in a note.
Against a basket of six major currencies, the dollar edged up 0.2 percent to 93.117 (DXY).