/www.forbes.com/ TOKYO, Feb 14 - The dollar edged down in Asia trade on Friday morning on rising fears of terror attacks and escalating concerns over the possibility of war in Iraq ahead of a key report from U.N. arms inspectors later in the day.
The greenback also struggled after the yen received some support from a surprise increase in Japan's October-December gross domestic product, which grew 0.5 percent from the previous quarter.
But the data did not trigger heavy yen-buying as it also showed that deflation still had a stranglehold on Japan.
"The dollar is running out of breath with the market shifting back its focus to Iraq," said Koichi Abe, manager of Aozora Bank's foreign exchange section.
"The GDP data came at a time when the market was sensitive to dollar-selling factors, although I don't think the market is convinced about Japan's economic outlook," he said.
The dollar was trapped in a narrow band of 120.28-120.67 yen in Tokyo as dealers hesitated to take new positions ahead of the report on Iraq's arms cache to the United Nations by chief weapons inspectors Hans Blix and Mohamed ElBaradei.
The market was also reluctant to trade actively ahead of a three-day holiday in the United States.
At 0255 GMT, the dollar was quoted at 120.40/45 yen compared with Thursday's late New York level of 120.57/65.
The euro was at $1.0835/38 against late New York's $1.0828/32. Against the yen, the single currency was at 130.45/54 yen against 130.54/64 yen.
INTERVENTION CONCERNS
Besides concerns about Japan's economic prospects, the dollar also found some support from increased wariness over Japanese intervention as the greenback edges towards 120 yen, dealers said.
"There was a rumour last night in offshore markets that the Bank of Japan was placing bids around 120 yen to prevent the dollar from falling below that level," said a senior forex section manager at a Japanese trust bank.
"Such a rumour surfaces in the market constantly whenever the dollar falls because dealers have become very nervous after Japan's recent covert intervention," he said.
Japan's top financial diplomat, Zembei Mizoguchi, offered a fresh verbal threat on Friday.
Mizoguchi said the foreign exchange market was showing some signs of nervousness, but Japan was watching that this did not increase and was ready to take appropriate measures if necessary.
On January 31, Japan revealed that it had quietly bought $6.0 billion from mid-January.
ATTACK FEARS
The market was nervous about holding the dollar after the currency reacted sensitively in post-Asian trade on Thursday to heightened fears of attacks in Britain and the United States. "The market had been in the mood to buy back the dollar, but it seems tensions over Iraq and fears about attacks are overriding that," the trust bank manager said.
In Britain, flights were suspended out of the north terminal at Gatwick airport near London and a Venezuelan man was arrested under anti-terrorism legislation after a hand grenade was found in his baggage on arrival from Colombia.
Two arrests also were made close to Heathrow, the country's other main airport.
In New York, sub-machine gun toting police officers have tightened security at major transportation hubs, subways and landmarks.
In Washington, anti-aircraft missiles protected the Pentagon -- one of the targets of the Sept. 11, 2001, attacks -- and F-16 fighter jets were placed on 24-hour alert.
Concerns about attacks rose after the White House last Friday raised the nation's alert level to orange, the second highest.
Dealers said the dollar might have continued its recent upward trend if such fears had not emerged, as U.S. economic indicators were showing some bright signs.
U.S. retail sales in January, excluding automobiles, rose 1.3 percent, the fastest gain in over two years.
In addition, U.S. jobless claims showed a larger than expected fall to 377,000 from 395,000 the week before.
"Recent U.S. indicators showed some impressive signs, especially yesterday's retail sales data and jobless claims, but with uncertainty about Iraq remaining, people are still afraid of buying the dollar heavily," said Aozora's Abe.