The dollar edged up against the yen and steadied versus the euro on Tuesday, as traders took a breather from recent heavy selling after the European Central Bank chief warned against the single currency's rapid climb. Although worries about the US current account deficit continued to dog the dollar, traders leaned towards buying back the currency ahead of key trade data and the Federal Reserve's decision on interest rates.
"The market is taking a break from the recent dollar selling and it doesn't appear that the selling will resume in full force just yet, with the euro under some adjustment," said Kouki Muroi, deputy manager of Aozora Bank's forex trading group.
"I think the market will undergo some dollar bargain hunting before retesting lows."
On Monday, the dollar hit a record low against the euro and fell against the yen to its lowest level since April.
The slide was halted by comments on Monday from ECB President Jean-Claude Trichet, who said the euro's recent rise was "brutal" and unwelcome.
The last time he publicly discouraged the sharp rise in the euro was in January, when he had made similar remarks as the single European currency approached the then-record high just below $1.3.
The euro fetched around $1.2922, little changed versus the late New York level and about 0.6 percent off the record high of $1.2987.
The dollar bought 105.70 yen, above around 105.48 in late US trade and the seven-month low of 105.28 yen hit on Monday.
The market took little notice of remarks by Finance Minister Sadakazu Tanigaki, who repeated on Tuesday that Japan would take action if currency rates deviate from economic fundamentals.
Analysts say a key question in the market is when - if at all - the US Treasury will send a strong signal that it doesn't want the dollar to fall.
"So far, the Treasury has been repeating a 'strong dollar policy' mantra, which doesn't have any impact on the market," said Seiya Nakajima, chief economist at Itochu Corp.
"Judging from past experience, they become nervous only when the dollar's fall triggers capital flight from the US, which is not happening right now."
Overall, bearish sentiment remains for the dollar especially after it failed to gain on surprisingly strong US employment data for October, released last week, dealers said.
Traders said activity would likely slow until after the Fed's next policy decision and US trade figures for September, both due on Wednesday.
"Market players want to lighten their positions ahead of these events," said Muroi.
The Fed is widely expected to raise interest rates by 25 basis points to 2.0 percent. But traders were eager to see the statement that accompanies the decision, to determine the future pace of monetary tightening.
The strong jobs data raised prospects for another rate increase next month, some traders said.
The dollar remains pressured by concerns about the budget and current account deficits.
Trade data for September is forecast to show a deficit of $53.5 billion, compared with a deficit of $54.04 billion in August, the second-highest level on record.
The budget deficit is about $427 billion, or 3.7 percent of gross domestic product, while the current account, the broadest measure of trade, hit a record $166.18 billion shortfall in the second quarter.