The dollar hit a two-month high against the yen and held near a three-month peak versus the euro on Tuesday as the market cheered US efforts to tighten fiscal policy and optimism on the massive US deficits. The dollar was seen supported on US President George W. Bush's budget plan submitted on Monday, which aims to narrow the budget deficit to 1.7 percent of gross domestic product by fiscal 2008 from 3.5 percent in the current year.
"The US budget looks as if it is purely focused on reducing deficits, and combining that with what Greenspan said, it seems that the US is getting a bit more serious about deficits," said Luke Waddington, head of forex trading at Royal Bank of Scotland in Tokyo.
Federal Reserve Chairman Alan Greenspan said late last week that market forces and a more austere US fiscal policy should stabilise and may cut the current account deficit.
Analysts said the tone of Greenspan's comments was in stark contrast to comments in November, when he said the United States should cut its budget deficit to protect its economy from an inevitable dwindling of the overseas appetite for dollar assets.
The dollar fetched 105.30 yen, a level not seen since December 15. It had bought 104.84 yen in late New York trade.
Tokyo dealers noted non-Japanese names bought the dollar/yen all day, while Japanese names sold the US currency.
They added that stop/loss orders at current levels and beyond were holding back additional dollar gains for now.
The euro was little changed at around $1.2765 after it fell to a three-month low of $1.2732 on Monday.
Analysts said that given the euro's break below key technical levels in past sessions, long-term investors who had been short on the dollar were starting to cover such positions.
The dollar has clawed back nearly 7 percent against the euro since the start of the year, after concerns about the ballooning US current account and budget deficits drove the US currency to a record low around $1.3660 at the end of December.
Although Japanese Finance Minister Sadakazu Tanigaki said on Tuesday that the US administration had sent a clear message to cut the fiscal deficit, some traders were not convinced.
"The figures that Bush submitted are just proposals and we don't know if the budget will actually be cut (by that degree)," said Jun Kitazawa, assistant vice president of the forex section at Brown Brothers Harriman in Tokyo.
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