LONDON (AFX) - The dollar weakened against the yen in early trade, giving back earlier gains on short-covering, dealers said. "A lot of people will be surprised by the resilience of the yen, given the view that it was only repatriation flows that were supporting it," Halifax chief currency strategist Steven Halifax said. Commerzbank economist Patrick Bennett said however: "Our preference remains for further yen weakness over the medium term, though there needs to be further business done to discover where real levels of interest lie." WestLB currency strategist Michael Klawitter agreed the risks to the yen lie to the downside. Otherwise, Klawitter said that in the absence of significant US data before retail sales on Friday,the dollar will reflect events in the Middle East. "As Israel refuses to respond to US demands to withdraw its army and protests against possible military action against Iraq growing stronger, the US role of the undisputed global leader is clearly showing cracks," he said. "While the direct impact on the dollar may be small in the short run, the risk is that such a development may re-focus market interest on the domestic and external imbalances of the US economy," he said. Dealers said they do not expect the euro to make a sustainable break through the key 0.88 usd barrier. The currency did not react to a German newspaper report that Iran is planning to sell its oil in future mainly for euros rather than dollars as it believes the euro's depreciation has come to an end. In the UK, sterling lacks momentum in the absence of significant data.