/www.fxserver.com/ TOKYO, Feb 25 - The yen erased earlier losses in Asia by midday on Tuesday as security worries receded after Washington said a missile fired by North Korea into the Sea of Japan appeared to be part of a military exercise.
North Korea fired at least one short-range land-to-ship missile into the sea to the east of the Korean peninsula on Monday, the South Korean Defence Ministry said on Tuesday.
The news -- reported by Korean media before the government's announcement -- triggered panic sales of the yen early in the morning.
"People were taken aback when they heard about the firework. So they sold the yen," said Takashi Toyahara, a forex manager at Nomura Securities.
The dollar rose as high as 118.23 yen from 117.87/95 in late U.S. trade on Monday.
Later the greenback retreated to late New York levels after the U.S. State Department said the firing appeared to be part of North Korean winter training exercises.
A State Department official described it as a "periodic event".
"Although the incident has reminded the market of potential worries about the yen, it appears to be a bluff from North Korea," said Minori Takeuchi, vice president of research at J.P. Morgan Chase.
Tensions on the Korean peninsula have been rising since last October when U.S. officials said North Korea had admitted to pursuing a covert nuclear weapons programme.
Since then, North Korea has expelled International Atomic Energy Agency inspectors, pulled out of the Non-Proliferation Treaty and threatened to abandon the 1953 Korean War armistice.
As of 0242 GMT, the dollar was at 117.94/97 yen, not far off 117.87/95 marked in late New York.
The dollar hit a one-month low of 117.58 on Monday on expectations that Bank of Japan governor nominee Toshihiko Fukui would not promote aggressive monetary policy steps that would weaken the Japanese currency.
The euro was also near its late U.S. levels at $1.0787/92 and 127.18/29 yen
IRAQ BACK IN FRAME
Lingering worries about possible war with Iraq have also come back to haunt the dollar.
"Many experts think war is likely in the latter half of March," said Takeuchi of J.P. Morgan Chase.
The United States and Britain on Monday circulated a new U.N. resolution that declared Baghdad had failed to take advantage of its final opportunity to disarm peacefully.
France and Germany came out strongly against a new resolution and most other members of the U.N. Security Council at this stage oppose a swift move to war.
But with a vote by the Council -- and by extension any war -- not expected until after chief U.N. inspector Hans Blix speaks to the council around March 7, the dollar is likely to remain depressed for the time being, dealers said. Further complicating the dollar's outlook, many traders believe Japanese monetary authorities are likely to intervene should the greenback threaten to fall below 117 yen.
"The levels around 117.50 are considered to be where Japanese authorities conducted silent intervention last month," said a dealer at a Japanese bank.
"So caution about intervention should be strong," he said.
In fact, talk swirled in the market that Japan had already interevened in the market on Monday, although most dealers think such talk was purely speculation. Looking ahead, Tuesday will see some important economic indicators out of Europe and the United States.
Germany's closely watched Ifo business sentiment indicator is due at 0900 GMT.
Economists polled by expect the business climate index to fall to 87.2 in February from 87.4 in January, when it rose for the first time in eight months.
In the United States, the consumer confidence index compiled by the Conference Board due at 1500 GMT is expected to show confidence of U.S. consumers has depressed to levels below the nine-year low hit in January.
Economists on average expect the Conference Board's monthly gauge of consumer confidence to fall to 76.8 in February from 79 in January.