NEW YORK The dollar slipped back from nearly a four-year high against the yen on Tuesday as traders booked profits on its sharp rally, but the yen's weakening trend remained intact following the Bank of Japan's aggressive monetary easing plan announced last week.
Traders said option barriers at the psychologically important 100 level have slowed the yen's fall, but a break of that level looks inevitable after the BoJ pledged last Thursday to inject about $1.4 trillion into the economy over two years.
Nevertheless, after gaining about 7 percent in three days, investors felt the time was ripe to lock in gains.
"Dollar/yen is consolidating today before the next push higher," said Vassili Serebriakov, fx strategist at BNP Paribas in New York.
"The 100 level is very important as there is a lot of options interest around that level, but it is likely only a matter of days before we take out those options barriers and reach 100," he said.
The dollar was last down 0.4 percent on the day at 98.94 yen, having earlier risen as high as 99.66 yen on Reuters data, its highest since May 2009.
Traders also cited strong demand to take profits on the dollar's gains before 99.73 yen, the 50 percent retracement of the dollar's fall from the June 2007 peak of 124.16 yen to a record low of 75.35 set in October 2011.
"Given the breadth of yen bearishness, any reprieve would likely encourage investors to re-establish short yen positions at more favourable exchange rates," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington, D.C.
The euro hit a high of 130.03 yen on Reuters data, its highest since January 2010. It last traded up 0.2 percent at 129.48 yen.
Japanese Finance Minister Taro Aso said on Tuesday that the yen was undergoing a correction from previous "excessive" rises, though he stressed the country's monetary policy was aimed at beating deflation, not weakening the yen.
"Dollar/yen has moved so quickly, it is bound to have setbacks ahead of key levels, so I am not surprised it is not just flying through the 100 mark," said Niels Christensen, currency strategist at Nordea in Copenhagen.
"(But) ... everything is pointing to a weaker yen and everyone is happy to go with the flow."
AWAITING THE FED'S MINUTES
While the Bank of Japan's ambitious program has been dictating dollar/yen direction, the focus on Wednesday afternoon will shift to minutes from the last U.S. Federal Reserve monetary policy meeting.
Investors will be looking for insight surrounding the Fed's bond buying, called quantitative easing, a program that is tantamount to printing money and considered negative for the dollar.
Against the dollar, the euro was up 0.6 percent at $1.3084, having hit its highest since March 15 at $1.3100 after stop-loss buying was triggered near $1.3050.
Concerns about the euro zone - the bailout for Cyprus, political uncertainty in Italy and Spain's struggling fiscal and economic conditions - seem to have taken a back seat for now, strategists said.
"The euro is performing well on speculation that Japanese investors will start buying euro zone assets," said BNP's Serebriakov.
"The European Central Bank with its inaction at its policy meeting last week contrasted starkly with the BoJ's aggressive action and the ECB also seems hesitant to cut interest rates further, which benefits the euro," he said.
Ratings agency Moody's warned on Tuesday that prospects of Spain missing its public deficit target this year could result in its sovereign credit rating slipping below investment grade.
Higher-yielding commodity currencies, which tend to benefit when equities rise, hit multi-year highs against the yen.
The Australian dollar hit its highest since July 2008 at 103.99 yen and the New Zealand dollar rose to its highest since February 2008 at 84.49 yen.
The dollar also fell to a more than five-week low of 0.9304 Swiss franc, before recovering slightly to 0.9325 franc, down 0.3 percent for the day, according to Reuters data.