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NEW YORK (Reuters) - Rising tensions along the Russia/Ukraine border on Thursday upstaged upbeat U.S. economic data and pulled the U.S. dollar off session highs against the euro and yen as risk aversion took precedence.
Russian Defense Minister Sergei Shoigu said Moscow had begun military drills near the border with Ukraine, where it has deployed tens of thousands of troops in response to "Ukraine's military machine" and NATO exercises in Eastern Europe.
After U.S. durable goods data for March came in above expectations, the dollar rose versus the euro and yen, only to retreat on the headlines from Russia.
"Geopolitical risks are taking precedence. The move down in the dollar/yen in such a short period of time is pretty significant. This is all really risk aversion," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto.
The dollar fell 0.20 percent to 102.33 yen, after having been as high as 102.64 yen in earlier trade.
The euro bounced off its session low $1.3790 to trade up 0.09 percent at $1.3828. The euro fell 0.11 percent to 141.50 yen.
The yen found early support during Tokyo hours after Japanese Prime Minister Shinzo Abe said a trade deal with the United States had not yet been finalized.
In European trading hours, European Central Bank President Mario Draghi undermined the euro by reiterating the potential for asset purchases to ward off deflation risks. He warned that a rising euro, which effectively tightens the money supply at a time when the ECB is looking to boost economic stimulus, could force the ECB's hand on monetary policy measures.
"The exchange rate is an increasingly important factor in our assessment of the outlook for price stability," Draghi said.
An upbeat German IFO survey did help the euro reach a session high of $1.38435 before Draghi's comments, which stressed the ECB sees inflation remaining low for a prolonged period.
March U.S. durable goods orders rose 2.6 percent, above economists' forecast of a 2 percent gain. An increase in initial weekly jobless claims was pegged to seasonal factors and therefore discounted by the market.
"The stronger dollar is a reaction to better durable goods orders and how that influences changes to GDP projections," Brian Daingerfield, currency strategist at the Royal Bank of Scotland in Stamford, Connecticut, said prior to the escalation in Ukraine.
"This week has been a sort of holding week, and euro/dollar has been in a tight range because there has been no main driver to push the consensus view on (U.S. Federal Reserve) or ECB policy," he said, adding that next week's euro zone inflation data and U.S. April unemployment report will be key influences on future ECB policy.
Additional reporting by Anirban Nag in London and Masayuki Kitano in Singapore; Editing by Catherine Evans and Meredith Mazzilli