The dollar rose against the yen on Tuesday after China suggested a revaluation of the yuan may be further away than some had expected, and speculation grew that a G7 meeting would yield no surprises on currencies.
A Chinese official told in an interview that China, which has been under heavy pressure to relax the pegging of its currency to the dollar, needed more time to prepare for making the yuan more flexible.
The comments come ahead of a meeting of the Group of Seven finance ministers and central bankers on Feb. 4-5, with many in the market expecting exchange rate flexibility to be a focus of the discussions.
"Given the timing, this seems to be a pretty obvious message from China to 'lay off pressuring us on the yuan at the G7'," said Mitsuru Sahara, vice president of forex dealing at UFJ Bank.
"It's looking more and more like the G7 will be a non-event and the yuan revaluation is further away than we thought."
Sahara said the yen was vulnerable to further losses if officials from G7 nations were to express sympathy for China's cautious position at the meeting in London.
The market consensus is that the yuan will rise when Beijing eventually releases the currency from its peg to the dollar, giving other Asian currencies a boost. Some in the market have been buying the yen as a proxy bet on an imminent move by China.
Against the dollar the Japanese currency was at around 102.95 yen at 1:50 a.m. EST, down about 0.4 percent on the day.
The euro fetched around $1.3035, down a little from $1.3060 in late Monday U.S. trade.
The euro rose 0.2 percent to 134.25 yen.
The single European currency is down around 4 percent against the dollar since the start of the year as attention has returned to rising interest rates in the United States.
The Federal Reserve is expected to raise rates again next week, and then in March and May, which would bring interest rates to 3.0 percent, widening a yield advantage over the euro zone, which is now at 2.0 percent.
ANTI-CLIMAX?
The comments from China came after German Finance Minister Hans Eichel said on Monday that he hoped Asia would do more to promote flexible exchange rates.
The past week has seen a chorus of comments from European officials that the euro, which hit a record high against the dollar in December, has shouldered too much of recent currency adjustments.
U.S. Treasury Secretary John Snow said on Monday he did not expect the G7 to offer any new language on foreign exchange.
The communique from the previous meeting in October read: "We emphasize that more flexibility in exchange rates is desirable for major countries or economic areas that lack such flexibility."
There appeared to be no impact on the dollar after Snow reiterated on Monday that the Bush administration was committed to cutting the huge U.S. budget and trade deficits, which have been key factors in the dollar's three-year decline.
The U.S. Congressional Budget Office (CBO) will release an update of its projections of the U.S. budget deficit later on Tuesday. It will land amid widespread skepticism about the ability of President Bush to honor his pledge to halve the deficit within his four-year term.
"Whether they actually convince the market that's actually going to happen seems to be a bit of a debate at the moment," said Luke Waddington, head of forex trading at Royal Bank of Scotland.
JP Morgan said in a research note that any "dose of reality" on the budget deficit from the CBO could weigh on the dollar.