The dollar clawed higher on Monday, boosted by big losses in Asian stock prices as the currency market shrugged off the Group of Seven economic powers repeating a call for more flexible exchange rates. The dollar edged up against the yen as Japan's benchmark Nikkei stock average tumbled nearly 4 percent on worries about US growth and strained relations between Japan and China, prompting some traders to buy back short positions. "It's hard to see how the Sino-Japanese political tension will calm down," said Seiya Nakajima, chief economist at Itochu Corp. "When there's such large uncertainty no one wants to buy shares."
Sino-Japanese relations are at their worst in decades following a third weekend of sometimes-violent anti-Japanese protests in China.
With Tokyo traders preoccupied with the sharp fall in Japanese stock prices, the market hardly reacted to a statement from the G7 finance ministers after their weekend meeting.
The communique repeated a 14-month-old call for "more flexibility" in exchange rates, widely viewed as a veiled reference to China's pegged yuan.
While US Treasury Secretary John Snow said China was "ready now" to adopt a more flexible currency, analysts said the country was unlikely to bow to foreign pressure and was already setting the stage for a shift in currency policy.
"The signals are there that China is moving in the direction of allowing more flexibility, but not because of pressure from abroad," said Naomi Fink, senior currency strategist at BNP Paribas in Tokyo.
"I don't think that China is willing to be backed into a corner diplomatically," she said.
Some analysts said Snow's comments may be a response to congressional threats on China to loosen its currency peg. A bill in the US Senate would slap tariffs on Chinese goods if the country does not relax its peg of 8.28 yuan per dollar.
The dollar edged as high as 108.07 yen, versus 107.80 yen in late US trade on Friday. It changed hands at around 107.90 yen.
The euro was down about 0.2 percent at $1.2890, still well above a two-month low of $1.2766 hit last week.
Data showing a surprisingly big drop in US consumer confidence and a sharp slowdown in New York manufacturing activity raised doubts about the strength of the US expansion, driving the dollar down on Friday.
Another report on Friday showed the United States was attracting more than enough foreign investment to fund its current account deficit. Foreign investors bought a net $84.5 billion of US assets in February, well above the roughly $55 billion needed each month.
"Although the capital flows data was not bad, other recent US economic data have been mediocre," said a trader at a Japanese bank. "I feel the dollar's rising trend is coming to an end."
However, he also said that a fall in global share and commodity prices could prompt US investors to repatriate their funds - particularly when US interest rates are on the rise - and support the dollar in the near term.
The dollar has risen about 5 percent against the euro and yen this year, largely boosted by hopes for more aggressive interest rate increases by the Federal Reserve.
Many traders still expect the Fed to keep its "measured" pace of credit tightening but the recent sharp fall in US stock prices has ignited speculation the Fed could slow down the pace of tightening.