The dollar slipped against the yen as investors looked ahead to a Group of Seven meeting even as comments by the U.S. Treasury chief suggested the United States was not too concerned by the yen's weakness.
U.S. Treasury Secretary Henry Paulson told U.S. lawmakers the yen's value was set by market fundamentals, which traders said suggested the government saw no problem with the Japanese currency's weakness.
"Some people might not like where it's trading, but it's my job to support and fight for free competitive markets, and I believe that the yen is trading in a competitive marketplace based upon underlying economic fundamentals," Paulson said in response to questions from the House of Representatives Ways and Means Committee.
Paulson's "point is that the yen is already flexible in a market-determined way and so verbal intervention is not very effective," said Lara Rhame, senior currency strategist at Credit Suisse in New York.
The yen edged down broadly after Paulson's comments, though not to session lows, before edging higher. Earlier, the dollar fell to a three-week low below 120 yen.
Traders were unwilling to push the yen lower as they looked ahead to a meeting this weekend of the G7 major industrialized countries in Essen, Germany, where finance officials are expected to discuss the yen's broad weakness.
The dollar slipped against the euro, mostly due to technical factors, while the euro rose against the yen.
European officials have been unhappy about the yen's weakness because it has made their exports more expensive in Japan. Japanese and U.S. officials have been playing down the issue, leading some to conclude that the meetings on Friday and Saturday will not present a united front on the yen.
A U.S. Treasury official said today that G7 members would discuss foreign exchange rates in the "normal course of business."
The yen saw strength early in the global session as investors unwound short positions, bets the currency will fall, in anticipation of the G7 event.
"We've been driven by yen news in the last week," said John McCarthy, director of foreign exchange trading at ING Capital Markets. "There is no data and nothing is dollar negative."
Some analysts said that while G7 officials may not single out the yen officially, the practice of carry trades -- using low-yielding currencies to fund purchases of higher-yielding assets -- could well be mentioned.
"We do believe that the carry trade does not create the stability that the monetary authorities ultimately seek, which is why we argued for bilateral discussions last September," said Gavin Friend, currency strategist at Commerzbank in London.
"However, we also think the point has not yet been reached where the G7 will formally acknowledge this as a group in its communique and therefore the yen can weaken further," he added.
Some of the gains in the euro were technical, analysts said.
"Some short euro positions were pared back after a few tries to break through the $1.29 level," said McCarthy.
Speeches by Fed Chairman Ben Bernanke and Chicago Fed President Michael Moskow did not address the economy or currencies and had no impact on financial markets.