The yen rebounded Tuesday, rising from a nearly three-year low against the dollar hit during the previous session, after an official from the Group of Seven said a statement by the group was meant to express "concern about excess moves" in the Japanese currency.
The yen plunged late on Monday after U.S. Treasury Undersecretary Lael Brainard said the United States supports Japan's effort to end deflation and stimulate growth. But she clarified that Japan needed to honor its G7 commitment on market-determined exchange rates.
However, her clarification was not enough to slow the yen's slide. On Tuesday, there was more back and forth from the global finance group. "The G7 statement was misinterpreted. The G7 statement signaled concern about excess moves in the yen," the official said Tuesday. "The G7 is concerned about unilateral guidance on the yen. Japan will be in the spotlight at the G20 in Moscow this weekend."
The official was referring to a meeting of the Group of 20 finance ministers in Moscow this Friday and Saturday.
The G7 said it remained committed to market-determined exchange rates, adding that fiscal and monetary policies must not be directed at devaluing currencies.
George Dowd, head of foreign exchange at Newedge in Chicago, said that while he does not believe there will be any statement condemning yen weakness, comments out of Japan for the rest of the week could further support the Japanese currency ahead of the G20 meeting. "I would be surprised to see new highs in dollar/yen above 94.07 this week and thus would look for low-risk spots to establish short trading positions in the short term," he said.
The dollar last traded at 93.46 yen, down 0.9 percent on the day. That was below Monday's high of 94.42 yen, which was its strongest since May 2010. The greenback has risen 7.8 percent against the yen so far this year.
BNP Paribas said its technical indicators suggested that the dollar was overvalued against the yen at current levels, with fair value estimated at 91.05 yen.
Short-term volatility on the dollar against the yen spiked in the options market in the wake of the G7 statement, closing at 12.988 percent, its highest in 1 1/2 years.
The euro fell 0.6 percent versus the yen to 125.74 yen. On Feb. 6 it hit a nearly three-year high of 127.71 yen. The common currency has risen about 10 percent against the yen, leading to strong protests from some European leaders that a strong euro would hurt a fragile economic recovery.
The yen tumbled earlier in the global session after the G7 currency statement, as markets initially thought Japan had received a green light to continue efforts to reflate its economy.
(Read More: Could Weak Euro Zone GDP Spell End to Austerity?)
"Today's official response from the G7 on ... currency wars raised the stakes for this week's G20 meeting at which Japan may find itself on the hot seat over its aggressive policies to effectively cheapen the yen as a ticket to economic prosperity," said Joe Manimbo, senior market analyst, at Western Union Business Solutions in Washington.
Currency Wars Talk 'Overdone'
The euro was up 0.3 percent against the dollar at $1.3452, benefiting from its rise versus the yen. Gains accelerated after European Central Bank President Mario Draghi said talk about a currency war is way overdone.
Atlanta Federal Reserve Bank President Dennis Lockhart also echoed Draghi's comments, saying that there is no currency war. He declined to comment, however, on the yen's weakness.
Concerns about a bailout for Cyprus, a Spanish political scandal and Italy in the run-up to Feb. 24-25 elections are likely to check gains in the euro.
Jonathan Lewis, founding principal and chief investment officer at Samson Capital Advisors, was not particularly impressed with the euro and has brought his roughly $7 billion fund's "slight overweight" on the currency to "underweight."
"There are green shoots in the euro and there are some positive aspects, but this is not a reason to take the euro to the higher end of the trading range," said Lewis. "There are some outstanding issues in the euro zone and we think the euro in the upper $1.30s is fully valued."
In European bond markets, Spain sold 5.6 billion euros of 6- and 12-month debt, beating the top end of the target amount, but paid a higher yield on the longer-term paper as a political corruption scandal weighed on shaky confidence.
In the United States, the focus will be on the evening's State of the Union address by President Barack Obama for any signs of a deal to avert automatic spending cuts due to take effect March 1.