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LONDON (Thomson Financial) - The dollar edged slightly lower after solid overnight gains as both European and Japanese officials expressed concern about the recent sharp rises in their currencies against the US unit.
While intervention to prop up the dollar is seen as unlikely, officials are increasing the pressure on the US administration to reiterate its strong dollar policy following the recent steep falls against a range of major currencies.
'Both Japan and Europe are becoming increasingly concerned by recent developments in the currency markets and are notably making very deliberate reference to wording from past G7 statements,' said Simon Derrick at the Bank of New York (nyse: BK - news - people ) Mellon.
Speaking late yesterday, euro group president Jean-Claude Juncker said current exchange rates do not reflect economic fundamentals and excessive volatility is not desirable for growth.
European Central Bank governing council member Guy Quaden also called on the US to reiterate it favours a strong dollar.
But attention will now turn to Thursday's interest rate decision and accompanying press conference by ECB president Jean-Claude Trichet, who has repeatedly focused on the risks of rising inflation.
'Any mention of euro strength by ECB President Trichet in the press conference (after the rate decision) is likely to weigh heavily on euro/dollar and euro/sterling,' said Steve Pearson (nyse: PSO - news - people ) at HBOS.
Meanwhile, the yen came off highs across the board after Japanese officials warned of the strong yen's impact on consumption and earnings at companies.
Among other currencies, the Australian dollar recovered slightly after sharp falls overnight. The losses came after the Reserve Bank of Australia raised interest rates as expected but noted the cumulative impact of four interest rate rises since mid-2007 have produced a substantial tightening in credit conditions.
This has raised speculation the central bank may be inclined to adopt a 'wait and see' approach before opting to raise-again.
The Canadian dollar has also remained on the weak side ahead of today's Bank of Canada rate decision, where the chances of a 50 basis point rate cut have increased after data yesterday revealed a sharp drop in GDP growth in December.
'Recent developments in Canada - very soft December GDP data pushing expectations toward a 50 basis point rate cut today - and Australia - a more dovish than expected tilt to the RBA statement last night and weaker than expected December retail sales - have sapped both the Australian and Canadian dollars of some momentum,' HBOS' Pearson said.
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