Dollar on defensive ahead of US deficit data

The dollar held near a one-week low against the yen on Wednesday ahead of US trade data that could swing the market's focus back to the problem of huge deficits in the United States. The yen was broadly firm, staying near a six-week high versus the euro after the European Central Bank's chief economist suggested that Asian currencies were more able than the euro to bear the burden of the dollar's broad weakness.
While Otmar Issing's comments were seen directed at China, which pegs its currency to the dollar, the free-floating Japanese unit was affected the most, rising a full yen from the day's low against the dollar on Tuesday.
Many traders assume Asian currencies, including the yen, will gain if China revalues the yuan, given strong economic ties within the region.
"Issing's comments could lead to speculation about Chinese revaluation ahead of the G7 meeting," said Takashi Toyahara, forex manager at Nomura Securities.
Financial chiefs from the Group of Seven major economic powers are slated to meet in London on February 4-5.
The dollar fetched around 103.45 yen, up slightly from 103.32 yen in late US trade but not far off the one-week low of 103.11 yen marked in New York.
For the moment, Japanese importers' bids lined up in the 102.75-103.25 yen range were seen providing support for the dollar.
The euro was at 135.65 yen, near a six-week low around 135.40 yen hit in late New York trade.
Dealers said the euro looked set to fall below 135 yen for the first time since late November.
The euro bought $1.3115, little changed from the level in late New York trade, and about one cent above the six-week low around $1.3025 hit last Friday.
The euro has fallen more than four percent from its record high of $1.3670 hit late last month, when concerns about the widening US current account deficit led to aggressive dollar selling.
J.P. Morgan Chase Bank, which has kept a bearish view on the dollar for many months, said in a report that the latest adjustment could continue for some time, noting that the dollar's technical rebounds since 2002 typically lasted about three months.