NEW YORK (Reuters) - The yen tumbled against the dollar and the euro on Tuesday, reversing the previous session's sharp gains as investor anxiety triggered by a record plunge in gold prices eased, denting demand for the safe-haven Japanese currency.
A drop in U.S. consumer prices and a dip in factory output strengthened the argument for the Federal Reserve to maintain its monetary stimulus in hopes of boosting the U.S. economy.
"The CPI data reinforces the view that the Fed is likely to engage in quantitative easing for some time," said Eric Viloria, senior currency strategist at Forex.com. "That is one of the reasons for support of the markets and sentiment in general. I think that is aiding the rebound here (in the yen) and why the U.S. dollar is weak."
Finance ministers and central bankers from the Group of 20 leading economies will discuss economic and financial market outlooks, including the Cyprus crisis and asset price reactions, at talks beginning on Thursday in Washington.
The euro, meanwhile, rallied on Tuesday to a seven-week high against the dollar, partly helped by its 2 percent jump against the yen. Investors shrugged off data showing a sharp fall in German investor sentiment in April.
A break of the euro above its 100-day moving average against the greenback around midday in New York spurred some blackbox algorithmic trading that further boosted the euro zone currency.
"A more significant signal is if we close above that level and it looks like we might do that," Viloria noted.
The euro rose 1.1 percent to $1.3177, with central bank buying reported. It hit a session peak of $1.3201, the strongest since February 25, after breaking resistance around $1.3140/50. The next key level on traders' charts is in the $1.3270/1.3300 area.
Gold rose on Tuesday, one day after a record-breaking drop sparked a broad selloff in commodities and equities alike. Monday's explosions in Boston added to the nervous tone in financial markets.
Two bombs ripped through the crowd at the finish line of the Boston Marathon on Monday afternoon, killing three people and maiming and injuring more than 100. President Barack Obama on Tuesday called the bombings an "act of terror."
"Yesterday there was a lot of fear in the market, especially as people were watching what's going on in gold," said Douglas Borthwick, managing director at Chapdelaine Foreign Exchange in New York. "There's a thought that maybe things were overdone in the yen cross."
But as gold and stock prices stabilized and investors concluded that the Boston bombings may have been an isolated incident, they resumed buying higher-risk assets and selling the yen.
A senior Canadian financial official said Canada was supportive of Japan's effort to kick-start its economy and that the G20 believed policy should target domestic economies and not exchange rates. The comments added to buying sentiment for the euro against the yen from oversold levels, analysts said.
The dollar peaked at 98.15 yen, according to Reuters data. It last traded up 0.76 percent to 97.49 yen.
A sharp rally in the dollar against the yen stalled in recent sessions as investors booked profits ahead of significant resistance and option barriers at the psychological 100-yen-per-dollar level. Analysts said, however, that the weakening yen trend remained intact after the Bank of Japan's aggressive monetary easing earlier this month.
"The fundamental picture still remains supportive of a weaker yen going forward as the recent rebound over the last couple of days is unlikely to prove sustainable," said Lee Hardman, currency economist at BTMU, which forecasts the dollar at 109 yen in 12 months.
Investors will also closely monitor gold prices, and another plunge could renew demand for the most liquid currencies such as the dollar and yen.
The euro rose 1.9 percent to 128.48 yen, having hit a session peak of 128.99 yen, according to Reuters data.
The Australian dollar rose 0.78 percent to $1.0391, while the New Zealand dollar gained 1 percent to $0.8494. Both saw steep losses in the previous session.
(Editing by G Crosse)