The yen on Tuesday posted its best one-day gain against the euro in seven months and rose against the dollar after falling four straight days, as a warning from a Japanese minister about excessive yen weakness prompted investors to pare bearish bets.
The euro, meanwhile, fell against the dollar after three straight days of gains, pressured by weak German data and comments from Eurogroup head Jean-Claude Juncker that the euro zone common currency's exchange rate was "dangerously high."
Juncker's comments ran on Bloomberg News, traders said. Vassili Serebriakov, currency strategist at BNP Paribas in New York, was a bit surprised at Juncker's comments, coming as they did a few days after European Central Bank President Mario Draghi said in a press briefing that the euro's rate is currently at its long-term average versus the dollar.
"I don't think this signals a coordinated move among European officials to talk down the euro," Serebriakov said. "The euro's move hasn't been that extreme overall."
The euro has risen 0.9 percent against the dollar and more than 3.0 percent versus the yen so far this year. In the fourth quarter last year, the euro rose 2.7 percent against the greenback and surged more than 14 percent versus the yen.
Meanwhile, expectations of aggressive action from the Bank of Japan to weaken the yen have driven the dollar and euro sharply higher in recent months. The greenback notched a nearly 11.3 percent gain in the fourth quarter of 2012 and has risen more than 2 percent so far this year.
However, remarks by Japanese Economics Minister Akira Amari on Tuesday made investors nervous about the yen's fall. He said excessive yen weakness could hurt people by raising import prices. Amari's comments countered remarks made by officials over the past month that have strongly encouraged yen weakness.
With bets against the yen at lofty levels, many analysts contend the currency is poised for a short-covering rally, although it should prove temporary given widespread forecasts of forceful action from the BoJ to heal Japan's weak economy.
"Considering that dollar/yen has become extremely overbought, corrections are not surprising, but it is important to realize that Amari's bark is bigger than his bite because the Japanese would never stand in the way of yen weakness especially with their economy at its current state," said Kathy Lien, managing director at BK Asset Management in New York.
The dollar last traded down 0.7 percent at 88.82 yen, its worst showing in about a week. It hit a trough of 88.27 yen, but losses were pared in North America following the release of a mixed batch of U.S. economic data.
U.S. retail sales rose solidly in December while manufacturing in New York state contracted for a sixth month in January. Other data showed inflation pressures remained muted, with U.S. producer prices falling in December for a third straight month.
The dollar, however, may fare well over the next month as investors embrace its safety during a looming battle in Washington over raising the government's borrowing limit, the so-called debt ceiling.
The dollar's setback on Tuesday came a day after it hit 89.67 yen, its highest since June 2010.
Bets on aggressive easing from the Bank of Japan have weighed heavily on the yen in recent months. The BoJ has been under pressure from newly elected Prime Minister Shinzo Abe to adopt a 2 percent inflation target to beat deflation. The BoJ holds its next policy meeting on Jan. 21-22.
Amari's comments also buoyed the yen against the euro, which last changed hands at 118.17 yen, down 1.3 percent. That's the euro's best daily performance since June last year. The euro on Monday hit a 20-month peak at 120.12.
The euro earlier in the session slid on concerns about the U.S. debt ceiling debate and weak data from Germany, Europe's largest economy.
The German economy was hit hard by the euro zone crisis in the final quarter of 2012, shrinking more than at any point in nearly three years as traditionally strong exports and investment slowed, the Statistics Office said Tuesday.
After reaching an 11-month high on Monday, the euro last traded at $1.3308, down 0.6 percent on the day. It fell as low as $1.3266 on Juncker's comments in early afternoon trading.
The euro had been rallying in the aftermath of an ECB meeting last week. Comments by the ECB's Draghi were largely seen as supportive and served to downplay expectations of a near-term rate cut.
Despite falling against the dollar and yen, the euro gained against the Swiss franc, rising to a fresh 13-month high. The euro rose to 1.2413 francs, its highest since December 2011. It was last at 1.2391, up 0.5 percent.
The Swiss franc has come under selling pressure as concerns about the euro zone debt crisis have receded, prompting investors, who had bought the franc as a refuge from the euro's problems, to cut long positions.