The dollar came under renewed pressure yesterday, approaching a 3½-year trough against the yen and dipping to its lowest level in nearly a week against the euro.

A combination of position-shifting ahead of the weekend G7 meeting, the discovery of the poison ricin in US Senate mail and concerns about the US budget deficit conspired to weigh on the US currency.

The dollar slid to a low against the yen of Y105.25.

Suspected intervention in the European session pushed it briefly to Y105.8 before it eased back to Y105.4 by mid-session in New York.

In European trade yesterday, the euro closed at $1.2554, compared with $1.2419 on Monday, a rise of more than 1 cent.

Strategists said the discovery of ricin in US Senate mail was causing some jitters towards the dollar as terrorism fears resurfaced.

"The market is searching around for any direction it can get ahead of G7," said Mr Kamal Sharma, currency strategist at Dresdner Kleinwort Wasserstein.

The G7 meeting dominated market thinking throughout the day. On Monday, Mr John Taylor, US Treasury under-secretary, said that while currencies would be discussed, he expected that the focus would be on the group's efforts to promote global growth. The remarks added to a growing perception that an absence of a firmer line about currency movements from the group would lead to a new bout of dollar selling.

While European officials have emphasised the dangers of a strong euro and have pledged a united front at the meeting, Japanese officials have signalled their intent to continue intervening.

Moreover, market participants have interpreted a lack of comment by the US as an indication of official tolerance for a weaker currency.

"The US isn't going to say anything about currencies as long as it's not getting penalised for a weak dollar - which it is not, yet," said Mr Hans Redeker, head of currency strategy at BNP Paribas.

But "twin deficit" fears were cited as a reason behind the dollar's weakness yesterday after the US government estimated its budget deficit would widen to $521 billion for the current year.

"They can't expect bond yields to stay low for ever and if they're going to continue with deficits like this, the question is what risk premium the market will demand for holding US government assets," warned Mr Redeker, who said rising public debt could "crowd out" private investors and weaken the dollar. There were already some signs investors were looking elsewhere, he added.