Dollar stands tall vs yen, euro as risk aversion ebbs for now

TOKYO - The dollar stood tall against the yen and euro on Tuesday as a bounce in equities and crude oil prices tempered global risk aversion that battered the greenback last week.

The dollar was little changed at 114.63 yen JPY=, having gained more than 1 percent overnight.

It pulled away from a 16-month trough of 110.985 struck last week when a sharp slide in equities worldwide in wake of European banking woes, coupled with a slide in crude oil prices to 13-year lows, boosted demand for safe-haven yen.

The dollar has also gained more than 1 percent versus the Swiss franc CHF= this week after slipping to a 4-month low on Thursday against the safe-haven currency.

"I believe market pessimism, particularly towards the U.S. economy, that took hold at the start of the year was exaggerated," said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo.

"Thanks in addition to the stance shown by the Japanese authorities to stem the yen's appreciation, I see the dollar recovering towards 120 yen. But we will need to see additional factors that point to a U.S. economic recovery."

In wake of the yen's recent rally, Japanese Prime Minister Shinzo Abe said Monday that Tokyo would take action against "excessive currency volatility."

Still, in the longer-run dollar/yen and the currency market as a whole was expected to remain hostage to nervous swings in global risk appetite.

"It will be moves in the broader overseas markets, not domestic factors, that will keep dictating dollar/yen," said Junichi Ishikawa, market analyst at IG Securities in Tokyo.

""The authorities can draw a line in the sand, for example at 110 yen, and defend it through verbal or actual intervention. But they can only slow the dollar's fall given the variety of factors impacting the market currently."

The euro, which soared to a 4-month high of $1.1377 last week, was flat at $1.1172 EUR= after losing 0.9 percent on Monday, when market movements were slightly exaggerated as the U.S. markets were closed for a national holiday.

The common currency was also weighed down after European Central Bank President Mario Draghi said on Monday the central bank was ready to ease policy further in March, highlighting risks from financial market volatility, a global slowdown in growth, and low oil prices.

The dollar index .DXY =USD was up 0.5 percent at 96.652.

Commodity-linked currencies such as the Australian dollar touched an 11-day peak following gains in crude oil prices. The Aussie rose 0.4 percent to $0.7166 AUD=D4 with the ebb in risk aversion also providing the lift.

The Canadian dollar touched C$1.3763 CAD=D4 to the dollar, its strongest in 11 days.

Improving risk sentiment, European shares rose sharply for the second consecutive session on Monday, boosted by a rebound in banking stocks.

Shares in Asia followed suit amid a continuing rebound in oil, with Japan's Nikkei .N225 climbing 0.8 percent to add to Monday's 8 percent surge.

Sterling remained under pressure after Bank of England policymaker Ian McCafferty said inflationary pressures had fallen, although he still expected the next interest rate move to be up. The pound traded little changed at $1.444 GBP=D4 after slipping 0.5 percent overnight. -Reuters