NEW YORK (CNN/Money) - The dollar fell to a seven-month low versus the yen but gained a little ground against the euro Monday, although it remained near record lows amid concerns about the U.S. ability to fund its current account gap.
The dollar had fallen to ¥105.18, its weakest since April, before trimming losses to ¥105.32. The yen also drew support from Tokyo stocks, which closed up nearly two percent at a five-week closing high.
The greenback stood at $1.2945 per euro, close to the all-time low of $1.3005 set last week.
Dealers said the market was testing the resolve of Japanese monetary authorities to see if they would intervene selling yen to defend 105.00 yen as some sort of line in the sand.
But Rebecca Patterson, currency strategist at JP Morgan in New York, reckons Japan's Ministry of Finance will only act if and when the year's low of 103.40 yen comes under threat.
"I don't think intervention risks are that big for Japan (right now), especially if the stock market continues to rise," she said.
The dollar trimmed gains as U.S. Treasury Secretary John Snow stuck to his usual line, repeating Monday that the United States backs a strong dollar but rates are best set in markets.
"It seems the market has moved into a new range trading environment, but there are further upside risks for the euro/dollar," Marvin Barth, senior currency economist at Citibank, told Reuters.
"It also faces interesting tests from U.S. inflation data this week from which we expect strong readings. But the focus is on the adverse U.S. funding situation and it is becoming increasingly hard for the dollar to maintain its value as the current account deficit expands."
China's pegging of its currency to the dollar has drawn criticism from some quarters in Washington.
Snow said China was moving toward increased currency flexibility and the U.S. wanted Beijing to move to forex flexibility "as fast as they can."
"I don't see (Snow) deviating from the same script at all this week," Daragh Maher, senior currency strategist at Calyon, told Reuters.
Meanwhile, short-term Treasury prices inched lower in anticipation of a strong reading of the Producers Price index and concerns that the falling dollar may allow inflation to creep back into the U.S. economy.
The two-year note slipped 2/32 of a point to 99-10/32 to yield 2.87 percent and the five-year note also shed 2/32 to 99-27/32 to yield 3.53 percent. Bond prices and yields move in opposite directions.
The benchmark 10-year note was flat at 100-16/32 to yield 4.19 percent, as was the 30-year bond at 107-3/32 to yield 4.90 percent.
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