The dollar steadied against major currencies on Wednesday ahead of US inflation data, a key marker for investors trying to puzzle out whether the Federal Reserve is likely to cut interest rates any time soon.
September CPI data at 1230 GMT is forecast to show a rise in the core consumer price index of 0.2 percent, the same gain as in August. Investors are looking for the next move in US interest rates to be a cut from the current 5.25 percent, after 17 straight rises to June 2006.
"The balance of risks is starting to shift to the downside for the dollar," said Ian Stannard, senior currency strategist at BNP Paribas. "Strong data does not necessarily mean a strong dollar."
The yen briefly rose to a 10-day high versus the dollar and three-week peak against the euro in late Tokyo trade after business daily Nihon Keizai said the BoJ was concerned about carry trades, in which investors borrow yen cheaply to invest in higher-yielding assets overseas. A BoJ spokesman told Reuters that the central bank was not specifically beefing up its monitoring of such carry trades.
By 1145 GMT, the dollar was steady against the euro at $1.2534, within recent ranges, and against the yen at 118.61, off earlier lows of 118.33.
The dollar was down more than a yen from a 10-month high near 120 yen hit late last week. "We had a big shift in positioning in favour of the dollar at the end of last week, but there has been some disappointment that the euro didn't go through $1.2460 and the dollar didn't get through 120 yen," said Teis Knuthsen, head of FX and fixed income research at Dankse Markets in Copenhagen.
The euro hit a three-week low at 148.49 yen, before recovering to 148.81, steady from the US close. The yen got a small boost at the European midsession after a German government source said there was a chance China may show greater flexibility in freeing up its exchange rate next year. The yen often trades as a proxy for China's yuan.
Meanwhile, Chinese Premier Wen Jiabao said China would keep a tight grip on bank lending and land supply because it was too early to be sure that a recent slowdown in investment and credit growth would last.
European Central Bank Governing Council members John Hurley and Klaus Liebscher gave tacit backing to market expectations of a rate rise to 3.5 percent in December from the current 3.25 percent. But the euro got little support from their comments in separate interviews published on Wednesday, as both stressed that the bank had no fixed view on rates in 2007.
Liebscher and ECB President Jean-Claude Trichet speak in Frankfurt from 1430 GMT.
Sterling rose only slightly after minutes of the Bank of England's October policy meeting showed the two newest members of the Monetary Policy Committee, Timothy Besley and Andrew Sentance, voted for a rate hike from the current 4.75 percent.
Gains were muted, however, as a lower than expected rise in average earnings in the three months to August eased concerns about UK inflation.