The dollar slipped against the yen on Tuesday, pressured by nerves over economic talks between the United States and Japan, while Britain's pound soared after Prime Minister Theresa May called for an early general election.
Investors are watching ongoing U.S.-Japan economic talks for further signs of the direction U.S. trade policy could take under President Donald Trump, who campaigned on a protectionist platform and has complained of countries artificially weakening their currencies.
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The dollar gained overnight against the yen on comments by U.S. Treasury Secretary Steven Mnuchin that were seen favoring long term dollar strength, but reversed direction to trade 0.1 percent lower at 108.68 yen in morning trade in Europe.
Upbeat words from the U.S. and Japan after the first round of talks in Tokyo failed fully to quell worries among investors that Japan's long-running efforts to weaken the yen will affect the dialog.
"The talks ... are of potentially of significant consequence because the tone taken between the U.S. and Japan on trade really could give us a better idea about how far the U.S. is prepared to go down the road of protectionism," said Jane Foley, currency strategist with Rabobank in London.
Concerns about North Korea and French presidential elections also kept a lid on the dollar against the yen - traditionally a haven for capital in the face of political and economic stress - which has surged in the past two weeks.
"This morning perhaps the geopolitical tension has eased just a small amount. We have of course seen Trump suggest the main movements against (North) Korea are likely to be economic sanctions rather than military," Foley said.
Sterling surged to its highest levels since early February, up 0.9 percent at $1.2679, after May made a surprise call for an early general election to be held on June 8.
Analysts said markets were taking the move as a positive as polls show May likely to win the election, and a victory could strengthen her party's majority in government ahead of Brexit negotiations, reducing political uncertainty a notch.
The euro was 0.4 percent higher at $1.06840, having seen limited movement on Monday when many European markets were shut for the Easter holiday.
But investors were on edge ahead of this week's first round of the French presidential elections, with the one-week cost of hedging euro swings versus the dollar around its highest since before Italy's constitutional referendum last December.
Weaker prices for iron ore continued to weigh on the Australian dollar, which dipped 0.6 percent to $0.7540 after rising to a two-week high above $0.7600 on the back of upbeat Chinese growth data.
"Recent comments from the Reserve Bank of Australia (RBA) suggest that Australian policymakers are more likely to stay on hold going forward. In other words, AUD/USD is likely to remain range bound," analysts at Credit Suisse wrote in a note to clients.
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(Reporting by Ritvik Carvalho; additional reporting by Tokyo Markets team; Editing by Tom Heneghan)