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LONDON (Reuters) - The yen hovered near three-year lows against the dollar and the euro rose on Tuesday after the Group of Seven industrialized nations urged countries to refrain from competitive devaluations.
The G7 statement said it remained committed to "market-determined" exchange rates, reacting to weeks of concern that the new government of Japan's monetary easing policy, which has also weakened its currency, could trigger far-reaching currency wars.
"We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates," the group said.
The message offered little to suggest that Tokyo is going to come under serious pressure when G20 finance ministers and central bankers meet in Moscow at the end of the week, not least because the United States is employing similar policies.
Japanese Finance Minister Taro Aso welcomed the statement, saying it recognized Tokyo's policy steps were not "aimed at influencing currency markets".
The dollar edged up to 94.21 yen, from around 94.16 yen before the statement was issued and just short of Monday's 94.465 yen, which was the highest since May 2010. <FRX/>
U.S. Treasury official Lael Brainard also said on Monday that while competitive devaluations should be avoided, Washington supported Tokyo's efforts to reinvigorate growth and end deflation.
The euro, the main riser among major currencies over the last few months as confidence in the euro zone has rebounded, fell after the G7 statement but was quickly on the rise again after Switzerland's central bank said it was ready take further steps if needed to keep a lid on the franc.
As afternoon trading gathered pace, the euro was up 0.3 percent at $1.3430, its highest for three days.
There had been a brief rise earlier after ECB Vice President Vitor Constancio said the bank's employment growth and inflation forecasts next month were likely to be close to the December figures.
The comments doused rate cut hopes, re-kindled last week when the head of the bank, Mario Draghi, said it was looking to see whether the euro's recent rise risked pushing inflation below its comfort zone.
France has called for a "medium-term" target to prevent the euro becoming too strong, but the country's Finance Minister Pierre Moscovici made little headway with the idea at a meeting of euro zone finance ministers on Monday.
"There had been some growing suspicions that maybe, just maybe, the euro zone could potentially attempt to weaken the euro ... so this (G7 statement) helped counteract that," said Jane Foley, a senior currency strategist at Rabobank.
Having started the day down 0.2 percent, European shares were up 0.1 percent by 7:45 a.m. ET after London's FTSE 100 .FTSE and Paris's CAC-40 .FCHI and Frankfurt's DAX .GDAXI had all recovered.
In European bond markets, Spanish and Italian bonds inched up as domestic buyers took advantage of a recent sell-off, but the recovery looked fragile, given political uncertainty in both countries.
Spain sold 5.6 billion euros of 6- and 12-month debt, beating the top end of the target amount, but paid a higher yield on the longer-term paper as a political corruption scandal weighed on shaky confidence. Italy also saw costs rise as it sold 8.5 billion euros of one-year paper.
The ECB's Draghi is due to address Spanish lawmakers later on Tuesday to explain and defend the ECB's current monetary policy strategy against a backdrop of heightened concerns about the strong euro.
He is also expected to meet Prime Minister Mariano Rajoy, but the market does not expect them to discuss whether Madrid might need financial aid, which would trigger the ECB's bond purchase scheme.
U.S. stock index futures pointed to a broadly flat open on Wall Street, while Nasdaq 100 futures signaled a weaker start for technology stocks. MSCI's global share index .MIWD00000PUS was up 0.1 percent.
With little in terms of significant data, U.S. markets were focused on the evening's State of the Union address by President Barack Obama for any signs of a deal to avert automatic spending cuts due to take effect on March 1.
Financial markets showed a muted reaction, meanwhile, to the news that North Korea has conducted a nuclear test and said it would never bow to U.N. resolutions.
A nuclear test monitoring agency in Vienna said the blast was double the size of North Korea's last test in 2009. NATO condemned the move, calling it an "irresponsible act" that posed a grave threat to world peace.
Brent oil rose towards $119 a barrel, copper edged up, while spot gold stayed near a one-month low. <O/R><GOL/>
"The test was not something that makes your heart pound as much as a pressing situation between Iran and Israel," said Kaname Gokon, research manager at brokerage Okato Shoji, referring to the threat of possible military action to prevent Iran from developing nuclear weapons.
Editing by Will Waterman