The yen reached an eight-month high hit against the dollar today but then retreated after Japan's finance minister appeared to tone down comments suggesting he was comfortable with the currency's appreciation.
The dollar rose against higher-yielding currencies, including the euro, as weaker global shares reflected chilled risk demand. The single European currency brushed off a widely expected election victory by German Chancellor Angela Merkel.
The yen jumped to 88.23 yen against the dollar, its strongest since late January, rising for a third consecutive session after reported comments by Japanese Finance Minister Hirohisa Fujii that recent dollar/yen moves were not abnormal.
Later, however, Mr Fujii said he had never said he approved of a strong yen nor that he would leave a yen rise "as it is".
Japanese Prime Minister Yukio Hatoyama also weighed in, saying the recent rise in the yen had been been tough for small firms.
"It seems like he [Fujii] saw the moves his comments created and sort of backtracked to avoid further yen strength," said Christian Lawrence, a currency strategist at RBC Capital Markets in London.
"For the day ahead it looks like we are seeing the dollar trade on the back of its safe-haven credentials and FX moves seem to be tracking equities."
By 11am, the dollar was trading at 89.34 yen, clawing back some losses. Many options around 90 yen were seen expiring later in the day, and some market participants said the dollar may push near that level as cut-off time approaches.
The yen has rallied broadly, pushing the dollar down about 4 per cent so far this month on the view Japan's new government may be more tolerant than its predecessor of a stronger yen.
Overall, analysts said more yen gains were likely and that a rally to the year's high of 87.10 yen was possible.
The euro slipped 0.4 per cent to $1.4630, as a 0.2 per cent fall in European shares, hurt by lower metal prices, helped pull the pair further from a one-year high around $1.4842 hit last week.
Reuters