The dollar crept higher on Tuesday, edging away from a seven-month low hit against the yen the previous day, though dealers said it wouldn't be long before the US currency heads back down. Underlying weakness in the dollar will remain for as long as the market focuses on the widening US current account deficit and keeps the view that Washington wants a weaker dollar to curb it, traders said. "A break below 103.40 yen is on the horizon," said a senior dealer at a US bank.
The dollar fetched around 105.60 yen, up from 105.26 in late US trade, receiving some support from softer oil prices. It hit a seven-month low of 105.16 yen on Monday. Over the past month, it has slipped 3.6 percent against the yen, and many traders expect the fall to continue towards this year's low of 103.40 marked in late March.
A break through that level would take the dollar to a 4-1/2 year low.
The euro bought around $1.2925, down from $1.2950 in late US trade and about 0.5 percent below its record high of $1.3006 hit last week.
The single European currency has appreciated over four percent since mid-October.
According to data released on Monday, currency speculators on the Chicago futures market increased their net long euro positions in the week ended November 9, marking a second consecutive record high.
Net long positions taken by euro futures speculators increased to 57,529 contracts, from 53,465 the previous week, indicating strong selling pressure on the euro in the future.
"If the market was really reversing course, we would've seen more gains (in the dollar)," the US bank trader said.
The euro showed little reaction to comments from European finance ministers who met in Brussels on Monday.
French Finance Minister Nicolas Sarkozy said ministers were united in their concern about the dollar's fall against the euro. But Dutch Finance Minister Gerrit Zalm said they made no demands on the European Central Bank over the euro's rise.
"The market had not been expecting any specific measures on the euro from the meeting to start with. And comments were generally too weak to produce a market reaction," said Junya Tanase, strategist at J.P. Morgan Chase Bank.
With the current account shortfall the dominant theme in the market, dealers were waiting to see if US and the world's policy makers would come up with policy to tackle the deficit problem at a meeting of Group of 20 finance ministers this weekend.
The group, encompassing the Group of Seven developed countries as well as major developing nations including China, is set to discuss foreign exchange issues at the meeting.
Speculation is rife that China, which pegs its currency to the dollar will come under renewed pressure to revalue the yuan.
"The dollar's adjustment so far has mainly occurred against European currencies," said Satoshi Tokuda, forex manager at Sumitomo Corp.
"But given the growing US trade deficit with Asia, the Chinese yuan and Asian currencies could become the next target for currency adjustment."
Also on the radar is US capital flows data for September, due at 1400 GMT.
The US economy needs dollars in the form of portfolio flows or direct investment to finance the growing trade deficit.
If inflows are not big enough to offset the dollars going offshore to buy foreign goods, the dollar will likely weaken.
In August, net fund inflow was $59.0 billion, barely offsetting the monthly trade deficit.
Analysts said anecdotal evidence points to a smaller fund inflow in September, which would likely be negative for the dollar.