NEW YORK (MarketWatch) -- The U.S. dollar fell versus the euro and the Japanese yen Tuesday, as some signs of improvement in Europe helped the shared currency, while reticence among investors to hold risky assets favored the yen.
That left the Japanese yen to be the primary beneficiary of any safe-haven flows, while offering further evidence the inverse relationship between investors' risk appetite and the movement of the U.S. dollar continues to weaken.
The dollar index (DXY 80.22, -0.57, -0.70%) , measure of the greenback against a basket of major currencies, stood at 80.232, down from 80.784 in North American trade Monday afternoon.
The dollar bought 95.74 yen, down from 95.96 yen in late North American trading Monday but up from around 95.03 yen in late Asian trade Tuesday.
The euro rose about 1% to buy $1.4009, up from $1.3864 Monday afternoon.
U.S. equity markets opened with slight gains, with bulls capitalizing on the worst sell off in a couple months Monday, and as the U.S. Federal Reserve begins its two-day policy meeting. See more on Fed meeting.
The Federal Open Market Committee is widely expected to leave its fed funds rate target in a range of 0% to 0.25%, but investors will be watching to see whether the central bank unveils any changes to its Treasury and mortgage asset-purchase program to further boost liquidity.
"We think markets are still awaiting Wednesday's FOMC statement, which is expected to confirm the accommodative stance and maintain future anti-inflation policy credibility, and current Japanese yen gains on position adjustments should not be sustained," said Tomoko Fujii, senior currency strategist at Bank of America-Merrill Lynch in Tokyo, in a note to clients Tuesday.
European markets were up slightly in choppy trade, after major Asian indices closed in the red. See Europe Markets.
The dollar/yen currency pair "is drifting lower amid a general decline in global risk appetite," wrote strategists at Standard Chartered Bank. "Technically, short-term momentum indicators are pointing lower, arguing for further losses near term."
Immediate support is seen at 93.87 yen, the low from May 22, they said.
But some strategists see room for the yen to lose ground amid upcoming launches of Japanese investment funds. See Asia Markets.
Meanwhile, eyes are also on the U.S. Treasury Department's first major note auction of the week, with closed attention being paid for signals of overseas' investors willingness to continue buying dollar-denominated U.S. debt. See more on bond market.
The government will auction $40 billion in two-year notes (UST2YR 1.15, +0.02, +1.78%) on Tuesday, followed by a record $37 billion in five-year notes (UST5YR 2.72, +0.02, +0.67%) on Wednesday. Also $27 billion in seven-year notes will be sold Thursday.
A weaker-than-expected rise in the euro-zone purchasing managers index for June had little impact, strategists said.
The preliminary Markit euro-zone composite PMI rose to 44.4 in June from 44.0 in May. A reading of less than 50 indicates a contraction in activity, while a reading of more than 50 signals expansion.
Economists had expected a rise to 45.5. The disappointing result was tied largely to a fall in the euro-zone services PMI. See full story.
The surveys don't change underlying expectations that the recession has bottomed, wrote strategists at Brown Brothers Harriman. But they "can only reinforce our view that one can not get carried away at this stage: activity levels remain well in contraction territory and we are still a long way off from positive growth."
