The dollar retreated on Monday as a report that Japan's central bank is considering scaling back intervention added to dollar-negative variables like last week's bombings in Spain pressuring the currency.
A less aggressive Japanese market intervention policy would mean the dollar would lose major support going forward at a time when the Madrid blasts have led some investors to sell dollars and buy 'safer' currencies like the Swiss franc.
The dollar dropped over 1 percent after a report from Japanese news wire Nikkei said Japanese officials are mulling ending large-scale intervention by the end of March.
A US Treasury Department spokesman said Washington's policy in support of a strong dollar was unchanged and declined comment on the Nikkei report.
"The moment they (the Bank of Japan) point to an exit strategy it seems like a one-way street to more yen strength," said Lara Rhame, senior economist with Brown Brothers Harriman in New York.
But Rhame added that it was unclear from the Nikkei report just how likely Japan's intervention tactics are to change soon. Traders remain wary about the possibility of continuing yen-selling interventions by Japan to protect exporters.
Late afternoon in New York, the dollar trimmed some of its losses against the yen, down 0.5 percent, to trade at around 110.29 yen.
The one positive for the dollar on Monday, a report from the US Treasury showing stronger-than-expected capital inflows into the United States in January, proved short-lived.
No sooner had the data hit the market and the dollar began retracing losses suffered earlier in the session, than analysts began saying such strength in flows was not sustainable, undercutting trader views the report suggested a strong appetite for dollar-denominated assets.
The capital inflows data have taken on higher importance for the dollar given the pressing need for the United States to attract hefty inflows to finance its wide current account deficit, and the number looms large on traders' radar screens.
Geopolitical tensions caused by the Madrid bombings in which 200 died still dogged the dollar, given fears of further attacks. This is perceived as negative for the dollar as this meant a flight to safe-haven assets like the Swiss franc.
Foreigners' net purchases of US assets rose sharply to $100.2 billion in January from $80.8 billion in December, the highest inflow since May, 2003, Treasury said on Monday, driven partly by buying from foreign central banks.
Foreigners' net purchases of US Treasury bonds and notes were $46.9 billion, up from a net $29.8 billion in December.
The bulk of US Treasury purchases came from official or government accounts, specifically from Japan. Japan buys US Treasuries with proceeds from its yen-weakening intervention.
Late afternoon in New York, the euro was up around 0.4 percent against the dollar at $1.2271. The dollar was down about 0.7 percent at 1.2750 Swiss francs. Sterling was trading up 0.1 percent at $1.8056.
Strong US capital flows gave the greenback an initial push against the euro, because more dollar purchases meant additional funds to cover the burgeoning US current account deficit - broadly a measure of a nation's global trade.
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