The yen snapped two days of losses against the US dollar on speculation European policy makers will voice concern that Japan's currency is too cheap, prompting traders to reverse record bets on declines.
The currency also rose to a seven-day high against the euro on signs the G7 will debate the yen at a meeting on Friday and Saturday.
Data released last Friday by the Washington-based Commodity Futures Trading Commission showed traders on Jan. 30 had 173,005 positions that profit from a weaker yen.
"We see the yen supported this week ahead of the G7 meeting as the market expects the exchange rate will be discussed," Antje Praefcke, a currency strategist at Commerzbank AG, said in Frankfurt.
The yen advanced to 120.65 against the US dollar in London, from 121.13 late in New York on Feb. 2. It also climbed to 156.36 per euro from 157.01.
The yen rose against 15 of the 16 most active currencies today as Vice Finance Minister Hideto Fujii, the ministry's top bureaucrat, said the G7 will discuss financial and currency markets as usual when they meet this weekend.
German Finance Minister Peer Steinbrueck, French Finance Minister Thierry Breton and Italian Foreign Minister Massimo D'Alema last week said the G7 meeting of finance ministers and central bankers in Essen, Germany, will discuss the yen.
Steinbrueck will speak in Berlin tomorrow.
Japan is "unfairly manipulating" the value of its currency and the US must do more to address it, Representative John Dingell told Treasury Secretary Henry Paulson in a letter dated Jan. 31.
Paulson last week said he was unconcerned about the yen's value, saying in an interview in Washington: "the Japanese have a currency that is trading in an open marketplace based on fundamentals."
One-month yen options volatility last week reached a four-month high of 8.275 percent, signaling greater exchange-rate fluctuations that may prompt traders to pare record bets on the yen's fall.
Japan's currency today also climbed 0.4 percent to 93.49 against the Australian dollar and 0.4 percent to 237.32 against the British pound.
Losses in the dollar could be limited by speculation a US report today will show the pace of expansion in service industries improved last month.
The US currency could extend gains against the euro from Feb. 2, when it added the most in about a month after a US jobs report signaled the Federal Reserve was likely to refrain from lowering borrowing costs in coming months.
"I don't expect the Fed to cut rates until September," said Joseph Kraft, head of the interest-rate products and foreign exchange at Morgan Stanley in Tokyo. "This should support the dollar." The dollar could rise to ?121.70 today, Kraft said. It traded at US$1.2952 per euro from US$1.2961 on Feb. 2.
The index of non-manufacturing businesses used by the Institute for Supply Management probably rose to 57 last month from a revised 56.7 in December, the median estimate of 64 economists surveyed by Bloomberg News showed. The report was due at 10am Washington time.
The dollar last week touched the highest against the yen in more than four years as reports showed economic growth quickened and spending rose.
The US currency has been benefiting as traders cut bets on lower rates. Interest-rate futures last Friday showed traders saw a 10 percent chance the Fed will reduce borrowing costs by August, down from 12 percent a week earlier.
The euro could fall for a third day against the dollar on speculation a report today will show expansion in Europe's services industries slowed for a second month last month, weakening the European Central Bank's case for raising rates.
The bank could increase borrowing costs just once more next month. Its 19-member governing council will wait until March 8 before lifting the benchmark by a quarter point to 3.75 percent, said all but one of 25 economists in a Bloomberg survey. They were split about what will happen after that, with 14 predicting another increase in June.
"Europe's interest rates have been moving at a relatively slow pace when compared to the US,'' said Simon Derrick, chief currency strategist at the Bank of New York in London. "The interesting question is whether the euro is substantially overvalued."
The Royal Bank of Scotland Group Plc will probably say at 9am London time that its services index fell to 56.8 from 57.2 in December. A reading above 50 indicates expansion.
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