THE dollar came under renewed assault on currency markets yesterday after the Japanese Prime Minister triggered speculative attacks on the US currency.

Junichiro Koizumi put the dollar under fire after he told a committee of Japan’s Parliament that he believed his country should shift some of its huge foreign reserves holdings out of the currency.

“I believe diversification is necessary,” the Japanese Prime Minister said.

With currency markets sensitive to any suggestions that Asian nations might switch reserves out of dollars and into the euro or other alternative holdings, the Prime Minister’s remarks sparked an immediate response.

The dollar was sent tumbling to two-month lows against the euro, which was pushed back to levels above $1.34 for the first time since early this year.

But the euro’s gains, and the latest bout of dollar selling, subsided after Japan’s Ministry of Finance (MoF) moved to clarify Mr Koizumi’s comments.

The ministry said that it had no intention of shifting funds out of the dollar, and its most senior currency official was wheeled out to reassure markets.

“It would be unwise to sell dollars now under current market conditions,” Hiroshi Watanabe, Japan’s Vice-Minister of Finance for international affairs, said.

“We are not at a stage where we need to sell dollars in the market and immediately shift into other currencies,” he added.

Japan does not provide a breakdown of its reserve holdings by currencies, but its quarterly reports on foreign exchange intervention show that nearly all of its activity involved boosting dollar holdings as it has sought to push the US currency higher to thwart any appreciation of the yen. The reserves rose to a record Y20 trillion (£100 billion) in 2003, and a further Y15 trillion was added in the first three months of last year.

Since then Japan has not intervened on the currency markets — a development first foreshadowed in The Times.

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