TOKYO (AFX-ASIA) - The was higher top-heavy in midafternoon trade ahead of semi-annual congressional testimony by Fed Chairman Alan Greenspan later today and the European Central Bank's policy board meeting tomorrow, dealers said.
In overseas markets, the euro benefited from news that euro supporter Kenneth Clarke came first in the latest ballot for leadership of the UK Conservative Party, and from talk of a possible change to the US administration's strong dollar policy, they said.
"Rises in euro purchases by US hedge funds ... spread the rumour that there may be some secret agreement between the (Federal reserve) and ECB on adjustments to the strong dollar against the euro," Aozora Bank foreign exchange manager Kazuhiro Nishina said.
"If the change in the US foreign exchange market stance turns out to be true, the euro should skyrocket."
Shinsei Bank foreign exchange manager Masanori Hirabayashi said the European currency may rally towards the 0.88 usd level, "if the market hears anything that suggests that the US administration is ready to accept an adjustment of the strong dollar against the euro."
Aozora's Nishina, however, expressed doubts about any sharp rally in the euro back towards the 0.9 usd level, citing the underlying distrust of the ECB's monetary policy management.
"We can wait until the euro actually regains the 0.90 usd level before purchasing this currency," he said.
The dollar was higher against the yen after the Nikkei 225 index's fall to below the 12,000-point level, dealers said.
However, overall activity in dollar/yen was low, with investors paying closer attention to the euro, they said.
"When euro/dollar becomes the hottest segment, dollar/yen comes out of focus, leaving activity here rangebound," Aozora's Nishina said. "But, given the limited reaction to the Nikkei's fall today, the dollar may fall back towards the 124 yen level on position-adjustment."
The dollar's topside was also capped after Bank of Japan governor Masaru Hayami ruled out any immediate easing of monetary policy, dealers said.
However, "the underlying bull trend of the dollar remains intact, as there are no reasons or leads to buy into the yen now," Nishina said.