The yen hit a seven-week high against the euro and held near a one-week peak versus the dollar after this week's comments by the European Central Bank's chief economist urging Asia to share the burden of the dollar weakness.
The ECB's Otmar Issing said on Tuesday Europe has carried too much of the burden of recent foreign exchange adjustments and Asia must do its share, suggesting Asian currencies were more able than the euro to bear the burden of dollar weakness.
The dollar has been under pressure in the past few years, especially against the euro, due to concerns about the huge U.S. current account deficit. Markets are awaiting U.S. trade data later in the day to see how much the United States needs to attract funds to fill its gap.
"There were a lot of moves in the yen after the Issing comments. Central bankers in Europe are still quite sensitive to the euro's level and they are not comfortable given growing concerns about the euro hitting the euro zone economy," said Mitul Kotecha, head of global FX research at Calyon.
"In the short term (the narrowing of the deficit) might be positive for the dollar, but the bottom line is that there won't be a structural improvement."
By 3:30 a.m. EST, the yen had risen to 135.35 per euro, its highest since November 25.
The dollar held steady at 103.29 yen, having hit a one-week low of 103.09 on Tuesday.
Against the euro the greenback was also steady at $1.3115. It rose to a 1-1/2 month high of $1.3023 last week on expectations for higher U.S. interest rates, having set a record low of $1.3667 late in December.
The U.S. trade deficit is expected to have narrowed slightly to $54 billion in November from $55.46 billion in October.
"People have grown tired of the deficit issue and are looking for something else to trade on, like interest rates. But if the trade data is worse than expected, dollar selling could resume," said Toshihiro Azuma, FX manager at Sumitomo Trust and Banking in Tokyo.
PRESSURE ON ASIA
Issing's comments were seen directed at China, which pegs its currency to the dollar, but the free-floating Japanese unit was affected the most, rising a full yen from the day's low against the dollar on Tuesday.
China has resisted international pressure to revalue its pegged yuan currency, but pledged it will promote reforms on interest rates and foreign exchange.
The topic of flexible exchange rates is expected to be on the agenda when finance ministers and central bank governors from Group of Seven rich nations gather in London next month.
"Issing's comments could lead to speculation about Chinese revaluation ahead of the G7 meeting," said Takashi Toyahara, forex manager at Nomura Securities in Tokyo.
U.S. Treasury Secretary John Snow is due to speak later in New York. He surprised the market last week by saying he wants to "do things" to sustain the dollar and work with the Congress cut the budget deficit down.