The dollar tumbled to a three-month low against the yen on Monday after Group of Seven powers said China should let the yuan appreciate as a way of fixing global trade imbalances.
Finance ministers of the world's biggest economies called for major exporting nations to allow their currencies to rise against the dollar to help resolve the imbalances, highlighted by the massive US trade deficit and China's booming surplus.
The G7's new rhetoric came just as investors soured on the US currency as global imbalances took centre stage in the lead up to the Washington meetings and some central banks said they would shift reserves out of the dollar.
"The market was given a warning that it was a bit dangerous to be long on dollars," said the chief trader at a European brokerage in Tokyo, "then the G7 talked about the yuan and the currency pair that felt the pressure was the dollar/yen."
But analysts said the fall-out on the dollar may be limited as Chinese officials have made clear they will reform the yuan at their own pace, while the G7 stopped short of laying out concrete action to correct the trade imbalances.
"At the end of the day there is little the G7 is proposing to 'do' about the global FX issues it has identified," said Richard Yetsenga, currency strategist at HSBC in Hong Kong.
"This argues against a singular focus on this issue as a market driver, even in the near term," he said.
Instead the market's focus was swinging back to the outlook for short-term interest rates, especially with European Central Bank chief Jean-Claude Trichet and Federal Reserve Chairman Ben Bernanke both slated to speak this week.
Trichet gives a talk at the Council on Foreign Relations in New York at 2200 GMT.
The dollar has suffered from mounting expectations the Fed will soon end a nearly two-year campaign of raising rates while the ECB is poised to keep tightening through the year.
The Fed is widely seen lifting overnight rates to 5 percent in May, what would be a 16th straight interest rate increase. But investors increasingly believe the central bank will then take a break to assess the impact of the tightening.
The dollar fell about 1 percent against the Japanese currency to a low of 115.32 yen on electronic trading platform EBS - the lowest since January - before clawing back to 115.70 yen.
Japanese investors and importers snapped up dollars around the lows, traders said.
The euro slid to 142.90 yen down about a yen from late New York trade on Friday and off an all-time high of 145.51 struck last week.
The euro edged up to $1.2355 after climbing as high as $1.2380, near a seven-month peak of $1.2395 on EBS.
The US currency was also hurt after Osama bin Laden said in an audiotape attributed to him that the West was waging war against Islam. The G7 said that greater currency flexibility - code for appreciation - is desirable in emerging economies with large current account surpluses "for necessary adjustments to occur".
"The implicit message is that the US dollar needs to go down," said Cameron Bagrie, head of market research at ANZ Bank in Wellington.
On Monday both the Singapore dollar and South Korean won rose to their highest levels against the US dollar since the Asian financial crisis of 1997/98. But China kept a tight grip on the yuan, which weakened to 8.0183 per dollar from a close of 8.0170 on Friday.
Chinese central bank governor Zhou Xiaochuan said over the weekend that the yuan could probably begin to rise more swiftly but gradualism was still the guiding philosophy.
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