By William L. Watts & Lisa Twaronite, MarketWatch
LONDON (MarketWatch) - The dollar was lower versus the Japanese yen and the euro Wednesday, giving up earlier gains versus the single currency amid fading liquidity, strategists said.
The yen and the greenback both gained ground in Asian trade on safe-haven flows in the wake of Tuesday's downgrade of Greece's credit rating to BBB+ by Fitch Ratings. The dollar move, however, was reversed on a "massive short squeeze" in early European action, said Boris Schlossberg, director of currency research at GFT. Read more about Greece's downgrade.
"The gyrations are a sign that liquidity is clearly leaving the market as end of the year holidays approach and volatility could increase considerably over the next several weeks if the market faces any further exogenous shocks," he said.
The dollar index (DXY 75.97, -0.34, -0.45%) , a measure of the greenback against a trade-weighted basket of major currencies, fell to 75.945 from 76.225 in late North American trading Tuesday.
The euro traded at $1.4746, up from $1.4699 late Tuesday,.
The dollar fell against its Japanese counterpart to 88.03 yen from 88.40 yen late Tuesday. See real-time foreign exchange rates.
The British pound bought $1.6315, up from $1.6283.
Sterling is expected to be in the spotlight Wednesday as British Chancellor of the Exchequer Alistair Darling presents the government's annual pre-budget report, which includes updates of the government's deficit projections and borrowing needs.
Darling, Britain's finance minister, is expected to outline a range of measures designed to halve nation's deficit down from a level equal to around 12.4% of gross domestic product over four years. Read about the pre-budget report.
"The threat of a credit downgrade in the U.K. may not have been taken too seriously by the market this year, but unless the U.K. government can prove good progress towards deficit reduction, anxiety will likely heighten and sterling could post further losses," said Jane Foley, research director at Forex.com.
"Today's pre-budget report should thus offer some concrete signs that the government is taking fiscal responsibility seriously," she said.
Currency investors' reaction to disappointing economic data in Japan was muted since the figures were largely expected.
Revised gross domestic product data from the Cabinet Office showed Japan's economy grew just 0.3% in real terms in the July-September period from the previous quarter -- less than the on-quarter rise of 1.2% in the preliminary data, and even worse than economists' grim consensus expectations. See full story on Japan GDP.
On Tuesday, the dollar rose to its highest level against the euro in five weeks and gained against other major currencies, as worries about high levels of debt in Greece and Dubai led investors to buy assets that would offer protection in a crisis. See Tuesday's Currencies report.
