The dollar held within recent ranges versus the yen on Thursday as investors looked to next week's meeting of the Group of Seven rich nations for direction, particularly for hints on whether China would revalue its currency soon.
Earlier this week, major currencies see-sawed in uncertain trade as markets weighed the chances that China would move closer to revaluing the yuan around the G7 meeting.
But trading steadied because of mixed signals from Chinese officials and new comments from a G7 source that the group would not change the language on currencies adopted a year ago.
"A lot of sting has been taken out of the G7," said Peter Fontaine, currency analysts at KBC in Brussels.
"They don't want to change the wording and so the G7 could be a non-event," he said.
At 4:20 a.m. EST the dollar held virtually steady against the euro at $1.3066, after briefly touching a 10-day low of $1.3124.
The dollar was a touch higher at 103.27 yen and the euro was barely stronger on the day at 134.92 yen.
The dollar was knocked back against the yen on Wednesday after comments from a Chinese official briefly reignited speculation that Beijing could move a step closer to revaluing the yuan.
With the yuan pegged to the dollar, the yen has been traded as a proxy for the Chinese currency and has had a rough ride recently.
"Talk of Chinese revaluation is becoming a bit like the boy who cried wolf," said a trader at a British bank in Asia.
"I think the market will not respond much to speculation any more. The focus in on next week."
In early European trade, the euro also got a brief boost after data showed a German consumer sentiment index from the GfK market research group rising to 4.1 in February from a revised 3.1 in January.
LOST IN SPECULATION
A G7 source told on Wednesday that the group intends to use language on foreign exchange that would be identical to that used at their meeting last February in Boca Raton, Florida.
Industrialised nations meeting in Florida had said that excessive volatility and "disorderly movements" in currency exchange rates were undesirable.
They had also called for greater currency policy flexibility, in a thinly-veiled reference to Asian countries.
Few market players expect China to announce a policy change at the G7's London meeting next week, but they are looking for any hints of Beijing's thinking on how it will go about moving to a flexible foreign exchange scheme.
"The question is when China will take action," said Fumihiko Kawano, forex manager at Nomura Securities.
"Will it be in the first half of this year, as some in the market expect, or much later than that? They probably won't say it clearly, but the market is looking for clues."
BUDGET QUESTIONS
Market players were also getting nervous about Sunday's elections in Iraq, a cornerstone of U.S. policy, and the escalation of violence there.
Thirty-one U.S. troops died in a helicopter crash in Iraq and six more were killed in insurgent attacks on the deadliest day for American forces since they invaded the country 22 months ago.
Analysts said the violence raised worries of extra spending by Washington, which cast new doubts on any fiscal tightening there, which is needed to rein in the budget deficit.
"Iraq is not a good thing for the dollar. It may require a lot of spending and (President George W.) Bush is already sowing doubts if he is serious about cutting the deficit," said KBC's Fontaine.
Earlier this week, Bush asked for more than $80 billion in new funding for military operations this year in Iraq and Afghanistan, shattering initial cost estimates and pushing the total for both conflicts to nearly $300 billion so far.
In the near-term, traders were looking to U.S. durable goods orders in December, due at 8:30 a.m. EST.
Economists' median forecast is for a 0.5 percent rise, compared with a 1.4 percent gain in November.