TOKYO, Feb 6 The yen was supported on Tuesday as wariness that the Japanese currency's br

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TOKYO, Feb 6 (Reuters) The yen was supported on Tuesday as wariness that the Japanese currency's broad weakness may be scrutinised at a weekend meeting of the Group of Seven financial heads continued to spur yen short covering.

European officials have said the G7 will take up the yen issue, prompting traders to close short yen positions for now, particularly after data last week showed that such speculative positions had hit a record high for the third straight week.

Traders said this short covering could support the yen for now, although the overall trend to sell the yen due to the currency's low yield remained well intact.

''The market view remains for more selling of the yen for other currencies, but the yen's short positions as a result of such trading have also built up substantially, making players nervous about the risk of it strengthening,'' said Mitsuru Sahara, a senior trader at the Bank of Tokyo-Mitsubishi UFJ.

The G7 meeting of finance ministers and central bankers in Essen, Germany, on Feb. 9-10 remains the focus as European officials have been calling for debate on yen weakness, while Japanese and U.S. counterparts have been playing down the issue.

Japan's extremely low interest rates have encouraged investors to dump yen for higher yields elsewhere, helping to drive the euro to a record high against the yen while the dollar hit a four-year high versus the Japanese currency.

The yen's real, trade-weighted value plummeted to a 21-year low in January.

The dollar eased slightly to 120.25 yen from 120.34 yen in late U.S. trade, though it was off a one-month low of 120.02 yen hit earlier in the session.

The euro fell to a one-month low of 155.27 yen earlier in the session and was later trading at 155.40 yen down from 155.59 yen late in U.S trade.

The single currency was little changed against the dollar at $1.2920 G7 JITTERS European officials have complained that the yen's weakness gives Japanese exporters an unfair competitive edge over euro zone products.

Japanese Finance Minister Koji Omi said on Tuesday that he didn't know what would be discussed at the G7, adding that he would tell the meeting that Japan's economy is recovering amid stable prices.

Italian Prime Minister Romano Prodi said on Monday that the weakness of the yen was a serious problem, particularly because the U.S. dollar was also weak against the euro.

And Jean-Claude Juncker, chairman of the Eurogroup, said on Monday the G7 would ''certainly discuss the yen situation,'' but said it was still too early to say if the yen would be singled out in the G7 communique.

But despite the grumbling by European officials, few analysts expect the post-meeting statement to address the yen.

''I don't think the market is pricing in anything major to come out of the G7, I think people are just wary of being too long on the dollar/yen before the G7,'' said Joseph Kraft, head of forex and interest rates at Morgan Stanley in Tokyo.

Because of this, he said that it was possible for the dollar to rebound after the event.

At the same time, the dollar may be capped this week as the yen remains firm against other currencies on the G7 speculation.

The yen could also draw support if speculation ratchets up that the Bank of Japan may raise rates later in the month.

''Yen-positive sentiment may linger if prospects grow for the Bank of Japan to boost interest rates later this month,'' said Yuichiro Harada, a senior trader at Mizuho Corporate Bank.

Currently, Japan's money market players see around a 40 percent chance of a BOJ rate hike at its Feb. 20-21 policy meeting.

REUTERS CS DS1153

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