TOKYO, May 1 (Reuters) The dollar slipped to a three-month low against the yen and hovered near a one-year low versus the euro on Monday, coming under fire as the Federal Reserve appears set to soon end a two-year run of interest rate increases.
A renewed focus on U.S. deficits after the latest meeting of Group of Seven industrialised powers, worries about Iran's nuclear ambitions and deteriorating technical signals also conspired to turn investors against the dollar.
Last week's sharp slide capped off a rough April for the dollar.
The U.S. currency fell about 5 percent against the Swiss franc and sterling -- the biggest one-month drop versus each currency since September 2003 -- and slid 4 percent against the euro and about 3.5 percent versus the yen.
Analysts said the dollar may slide further in the days ahead even as market players have built up huge short positions, typically a sign that a reversal of a trend could be in store.
''The short-term risks are heavily biased that the dollar stays on the defensive,'' said Junya Tanase, currency strategist at JPMorgan Chase in Tokyo, in a note to clients.
The risks include potential sanctions against Iran by the United Nations Security Council and the U.S. Treasury's upcoming report on currency manipulators, he said.
U.N. ambassadors from the United States, Britain and France are expected to introduce a resolution this week to legally oblige Iran to comply with the council's demands, so far rebuffed by Tehran.
The signal from Fed Chairman Ben Bernanke late last week that the central bank is nearing the end of its long credit tightening campaign also means the dollar may benefit less from any surprisingly strong economic data, Tanase said.
Trading activity was expected to be limited with many financial centres closed on Monday for holidays.
Markets in Singapore and Hong Kong are closed, while those in Britain and many other European countries will also be shuttered.
Trading was also expected to be limited in Japan before the country's Golden Week holidays Wednesday through Friday.
In early Tokyo trade, the dollar changed hands near a three-month low of 113.62 yen hit on electronic trading platform EBS. Traders are closely eyeing the January low of 113.41 yen as a key technical support for the dollar.
Dollar buying by Japanese importers and investors were expected around current levels, but the coming holidays may remove that source of support later in the week, traders said.
The euro edged down to $1.2615 from near $1.2630 in late New York trade and off the peak at $1.2640, the highest since May last year.
The single European currency also edged down to 143.40 yen from 143.75.
Reflecting the big bets on a deeper dollar slide, speculators on the International Monetary Market racked up a record net long position in the euro of 65,525 contracts through last Tuesday. Yen short positions were slashed to a one-year low of 6,490.
The Fed is widely expected to raise rates for a 16th straight time to 5 percent at its meeting on May 10 but then take a break to assess the impact of the credit tightening that has boosted overnight rates from 1 percent in June 2004.
The dollar rallied 15 percent against the euro and the yen last year on the back of the Fed's repeated rate increases.
By contrast, the European Central Bank is expected to press ahead with its own campaign of raising rates all year while the Bank of Japan is expected to bump up overnight rates as soon as July, what would be the first hike in six years.
REUTERS DKS RK0655