The dollar fell back near to a multiyear low against the yen on Wednesday on the fading prospect of any kind of support emerging from a Group of Seven (G7) finance ministers' meeting at the end of the week.
Without G7 help, the dollar looks vulnerable, given renewed security fears after the discovery of toxic poison ricin in a US Senate building plus long-standing structural problems such as the US budget and current account deficits.
However, the greenback continued to get some support from the threat of intervention by the Japanese authorities, who bought a record amount of dollars in the market in 2003 to stem the yen's export-hurting rise and a record monthly amount in January.
At 0630 GMT, the dollar was around 105.40 yen, down slightly from Tuesday's late New York levels around 105.50 yen and just above its three-and-a-half year low of 105.22 yen hit in London trade on Tuesday.
Japanese exporters were eager to sell the dollar, remembering how it had fallen sharply both before and after the previous G7 meeting in Dubai in September, when the finance ministers called for more flexibility in exchange rates.
Speculation is growing that the G7 finance ministers and central bankers will not agree on any co-ordinated attempt to stop the dollar's fall at their meeting in Florida on Friday and Saturday.
"They are unlikely to agree to stop the dollar's fall," said Koichi Ono, an economist at Daiwa Institute of Research.
"The meaning of their call for "flexible" exchange rates in the previous G7 meeting was somehow stretched in the market, so they may change their statement. But that will not be enough to change the dollar's two-year downtrend," he added.
The call for "flexibility" in Dubai G7 was also taken as a criticism of Japan's repeated intervention and sent the yen sharply higher.
But Japan continued to intervene after that. "It's not clear that statement was aimed at Japan after all," said Fumihiko Kawano, a forex manager at Nomura Securities. "No country has formally complained to Japan, even after it did seven trillion yen intervention in January.
Indeed, traders said the Japanese authorities appeared even more determined to block the dollar's fall this time.
"Unlike the last G7 (in September), when the Japanese authorities refrained from intervening around the time of the meeting, their stance looks pretty different this time," Watanabe of Shinsei Bank said.
Traders said the Bank of Japan (BOJ) was believed to be keen to prevent the dollar from falling below 105 yen, where massive knock-out options are said to be lined up.
The euro was at $1.2545, slightly higher than a late US level of $1.2535, having erased earlier small losses caused by a sharp fall in the Australian dollar after the Australian central bank's decision to keep monetary policy unchanged.
The Australian dollar briefly dropped more than half a US cent from the day's high to around 76.10 US cents after the Reserve Bank left its official cash rate unchanged at 5.25 percent.
Although a majority of market players had expected no policy change, some had bet on a rate rise of 25 basis points.
Later the Australian dollar pared its losses and traded around 76.40 US cents.
With the Australian central bank meeting out of way, the market was shifting its attention to another high-yielding currency, the British pound, which has recently drawn support from the prospect of a credit tightening by the Bank of England (BoE).
The BoE starts a two-day meeting on interest rates later in the day and is widely expected to raise rates by a quarter point for the second time in three month.
Sterling was quoted around $1.8380, near its late US level of $1.8390.
Apart from the BoE, the European Central Bank (ECB) and the Bank of Japan also hold policy meetings this week but no changes are expected.