The dollar dipped on Thursday, the day after hitting a six-week high against the yen and a three-month peak versus the euro, with a rise in European share prices reflecting an easing in risk aversion.
The euro's rally was underpinned after Germany's finance minister repeated comments that euro zone countries would be forced to come to the aid of a fellow member state if it encountered serious financial problems.
The yen remained under pressure due to worries about the Japanese economy -- which suffered its deepest contraction in more than three decades in the latest quarter -- and political uncertainty as voter support for Prime Minister Taro Aso sinks.
"We've got stock futures pointing higher and that's going to help risk appetite so we're seeing the dollar reverse course a little this morning," said Rabobank strategist Jeremy Stretch.
German finance minister Peer Steinbrueck said earlier this week that euro zone countries would have to come to the aid of troubled members, mentioning Ireland as a country in difficulty.
He repeated those comments on Wednesday in the wake of concerns over the exposure of euro zone banks to the recession in Eastern Europe after a report from credit ratings agency Moody's earlier this week.
"The euro has been destabilized in recent sessions on concerns about Ireland and the East European story," Rabobank's Stretch said.
"Markets are reading these comments from Steinbrueck suggesting there would be some degree of cross-subsidization... and that's adding a little support to the euro."
The euro climbed 0.9 percent to $1.2652, recovering from a three-month low of $1.2511 touched the previous day, with markets also welcoming German moves to stabilize its banking sector.
The euro rose 0.5 percent to 118.23 yen, while the dollar fell 0.3 percent to 93.53 yen, having hit a six week high on Wednesday at 93.96 on trading platform EBS.
Japan's political problems continued to undermine yen sentiment, while the Bank of Japan left its key policy rate unchanged at 0.10 percent on Thursday, as expected.
It also extended the deadline for its buying of commercial paper to help corporate funding as it battles the credit crunch, with the economy in its deepest slump in more than the three decades.
With little room to cut overnight rates after bringing them down to near zero late last year, the BOJ is focusing on ways to improve funding conditions for financial institutions and companies in an economy hit hard by the global slump.
"There is an emerging view that the yen may not be so appropriate to buy, unlike before, at times of risk aversion," said Minoru Shioiri, chief manager of forex trading at Mitsubishi UFJ Securities.
Political uncertainty in Japan was adding to gloom about the economy, in contrast with the U.S. and European governments' swift moves to combat the global recession, traders said.
