The dollar ticked up on Tuesday as a spate of yen-buying inspired by a rise in Japanese stock prices lost steam and as the euro slipped ahead of key data on German business sentiment.
Traders said the dollar's minor gain was due largely to investors taking profits on the US currency's recent losses, while the absence of any key market moving events this week was seen keeping the yen susceptible to haphazard trade flows.
The Japanese currency has rallied in recent weeks as foreign investors continue their love affair with Japanese stocks.
The Nikkei share average bolted more than 1 percent at one stage on Tuesday to hit its highest level since July 2001, garnering more support from foreign investors who have already gobbled up some 6 trillion yen ($54.71 billion) of Japanese equities this year.
But the yen's strength was sapped as the Nikkei pared much of its gains to end trade just 0.16 percent higher.
Still, the yen remained supported by newspaper polls showing public support is growing in Japan for Prime Minister Junichiro Koizumi and his economic reform plans heading into the September 11 snap election.
Investors are also more upbeat on the Japanese economy. The Reuters Tankan, a monthly survey of business sentiment, showed on Tuesday that business confidence was flat in August but companies saw improvement in the months ahead.
"It's all about the yen right now," said Hideaki Furuyama, manager of forex trading at Trust & Custody Services Bank.
The dollar fetched 109.95 yen, up slightly after it slipped around 0.7 percent on Monday. The dollar touched a seven-week low of just above 109 yen last week.
The single currency bought $1.2220, slightly down from the level in late US trade but well above a three-week low of around $1.2125 hit on Friday.
The euro fetched around 134.40 yen, up from 134.26 yen in late US trade. The single currency hit a seven-week trough of 133.53 yen on Monday, breaking below a low of 133.58 yen hit soon after China revalued the yuan on July 21.
The ZEW Centre for European Economic Research will release its indicator of German economic sentiment at 0900 GMT. The data is expected to underscore a modest improvement in consumer sentiment in the euro zone's biggest economy.
A strong reading in that, or Thursday's closely watched Ifo survey of German business sentiment, will likely be taken by some investors as an excuse to buy the euro, Morgan Stanley strategists said in a research note.
The single currency has rebounded 3 percent from a 14-month low around $1.1870 hit on July 5, not long after voters in France and the Netherlands rejected the European Union Constitution.
The dollar has faltered this week after bouncing back against the euro and the yen last week following a series of strong data that cemented the likelihood of more dollar-supportive interest rate rises from the Federal Reserve in coming months.
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