Dim7- what does it relate to?

[EADG mx]

I think that it works very nicely to use a diminished chord on the 4th or 7th in a minor key. That way you get some nice voice leading going, especially with the leading note

[bassandbeyond]

BTW, there is a beautiful Luther Vandross tune (Nancy Wilson did a great version of it as well) called "Love Won't Let Me Wait" which goes: Bmin9-Fdim7-AMaj9

Although it resolves to a Major tonic instead of minor, this is otherwise the same dominant-tonic movement that the OP came up with. Interestingly, on Luther's version, some of the verses go Fdim7-AMaj, and other verses go E7-AMaj. The difference is very subtle, but the functional resolution is the same.

[HaVIC5]

Just so you guys know, a diminished chord doesn't always take on the role of a dominant function. It's intending as a chromatic passing harmony that can coincidentally imply dominant function, but doesn't always have to. For example, in the progression Dm7 Dbo7 | Cm7 F7 | Bbmaj7 the Dbo7 doesn't contain the tritone of the dominant of Cm7, but does chromatically voice lead into it nicely, aided by the chromatic root motion. Diminished chords can also resolve to a maj7 chord of them same root, which is a common sort of thing in Jobim tunes (No more tears, quiet nights of quiet stars, etc). It's also a common reharmonization that guitarists/pianists do on the first bar of Misty (Ebo7, Ebmaj7, Bb-7, Eb7, etc). This harmony comes from the classical concept of the auxiliary triad.