TOKYO (Reuters) - The dollar clung to last week's closing levels against major currencies in Asia on Monday but looked vulnerable to further falls as traders waited nervously to see whether Washington would decide to launch a war against Iraq. The first big event of the week comes later on Monday when U.N. weapons inspectors present their report on Iraq to the U.N Security Council.
Uncertainty over what the report will contain protected the dollar from further damage on Monday after heavy falls last Friday, but many in the market already see war -- and further dollar falls -- as inevitable.
Even if the U.N. report contains no hard evidence of Iraq's weapons development -- the so-called "smoking gun" -- analysts say Washington looks increasingly determined to oust President Saddam Hussein by force, prolonging the dollar's problems. "This is not the 'smoking gun' that the U.S. is looking for, neither is it absolution. In the final analysis, the inspectors' report may not be key," Marshall Gittler, senior currency strategist at Deutsche Bank in Tokyo, wrote in a client note.
The dollar has been on the slide since early December as investors shy away from U.S. markets because of uncertainty over what military action would bring.
The U.S. currency was little changed at 117.83/86 yen against 117.82 yen in late U.S. trade, and at $1.0835/39 per euro little changed from $1.0828.
On Friday, the euro had hit a three-year high of $1.0850, but eased later on comments from European Union Monetary Affairs Commissioner Pedro Solbes that the euro's rapid rise against the dollar "is a cause for concern."
As well as the potential developments on Iraq, traders were also being restrained by U.S. Treasury Secretary designate John Snow's confirmation hearing in Congress on Tuesday and the Federal Reserve's two-day policy meeting, starting on Tuesday.
U.N. INSPECTORS' REPORT
Although the U.N. Security Council's reaction to the weapons report is being closely watched, traders said that war had been largely priced in to the dollar's current value.
The gap between the United States and some of its key allies over how to handle Iraq showed no sign of narrowing over the weekend.
Secretary of State Colin Powell said on Sunday that the United States was willing to attack Iraq alone if allies peeled away, while French Foreign Minister Dominique de Villepin said the U.N. experts needed more time and that Washington should not rush alone into an attack on Iraq.
Britain, a staunch supporter of the U.S. hard line, said U.N. inspectors should be given time, but not months, to decide if Baghdad is cooperating with them.
With United States already sending a large number of troops and several aircraft carriers into the Middle East region, waiting for months for a more thorough report from the U.N. inspectors may be too costly for Washington, some analysts said.
Given the long build-up to the war, however, the dollar may not have much further to fall if it becomes reality.
"I think the market has already priced in the possibility of a war," said a fund manager. "If a war really happens, the dollar may fall for a short while but maybe that's it. That may be the time to close (dollar-short) positions."
Some traders think that could be when the Japanese monetary authorities will finally intervene in the market.
"I think they will wait until the U.S. attacks Iraq and the dollar falls. That would give them a perfect justification for intervention," said Kota Kimura, assistant manager at Shinkin Central Bank.
Japan's top financial diplomat, Zembei Mizoguchi, repeated the usual line on Monday that Japan's foreign exchange policy was unchanged and that action would be taken on exchange rates if needed.
But Gittler of Deutsche Bank noted that the euro's strength against the yen would probably make the dollar's weakness easier for the Japanese authorities to bear.
The euro was steady at 127.66/76 yen in Tokyo on Monday, having risen rapidly from around 121 last November.
Players are keenly awaiting any comments on foreign exchange from John Snow when he speaks in Congress on Tuesday.
Most traders say he has no choice but to stick to the official U.S. "strong dollar" line given that the nation needs foreign capital to finance its huge current account deficit, although he may not be explicit.
"I think he'll say no change in forex policy and he won't say he wants a stronger dollar," said the fund manager. "What else can he say?"