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Dollar Mixed Ahead of Employment Report, G7 Meeting

The dollar was little changed ahead of the U.S. payrolls report on Friday and a Group of Seven rich nations meeting next week.

U.S. core inflation data for December, stripping out food and energy costs, provided no inspiration for the market.

Dealers have steadily unwound some overextended carry trades, in which they borrow in a currency with low interest rates to buy one with higher rates and profit on the spread.

"There is a lot of soul-searching going on about whether carry trades are really safe to embrace or if they should be treated more selectively," said Lara Rhame, foreign exchange
strategist with Credit Suisse in New York.

The yen has gained across the board as speculation intensified that G7 finance chiefs might discuss yen weakness at next week's meeting, which could prompt broad buying in the Japanese currency.

U.S. Treasury Secretary Henry Paulson said on Wednesday he was watching the value of the yen "very, very carefully."

Japan's top financial diplomat Hiroshi Watanabe said some G7 members may mention the yen as part of the discussions although he did not see a panic unwinding of yen carry trades.

Analysts point to increasing nervousness on whether yen carry trades can be sustained.

"I see trepidation as we move to next week's G7 meeting. There will be a similar situation to the last G7 ... where European finance ministers get in front of every microphone available to say that the yen is trading too cheaply," said Steve Barrow, currency strategist at Bear Stearns in London.

The U.S. core personal consumption expenditures price index, seen as the Federal Reserve's favored gauge of inflation, rose 0.1% in December. On a year-over-year basis, the core PCE index was up 2.2%.

The dollar failed to move substantially after the Fed held its benchmark overnight interest rate steady as expected on Wednesday and maintained a warning on inflation risks.

It also said inflation pressures were likely to moderate and further tightening of monetary policy may be needed depending on the inflation and economic outlook.

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