The Japanese yen tumbled to a 13-month low against the dollar and slipped against the euro after media reports suggested the Bank of Japan may not raise interest rates at its policy meeting this week.
Japanese news agency Kyodo reported that the BOJ is unlikely to raise interest rates at this week's policy meeting, citing "sources familiar with the matter."
A report by the Nihon Keizei Shimbun (Nikkei) echoed the sentiment as did Japanese broadcaster TBS television, which said earlier that BOJ officials are in the final stages of coordinating on holding off raising interest rates at the two-day policy meeting that ends on Thursday.
"The yen is going to be in the spotlight until the BOJ announcement," said Ron Simpson, director of currency research at Action Economics in Tampa, Florida. "The yen will be choppy
and driven by Japanese media reports."
The dollar climbed as high as 120.77 yen, its highest since December 2005, according to Reuters data.
Kyodo quoted sources as saying the central bank has judged it necessary to monitor prices and consumption for now before deciding whether to raise the key overnight call rate target from its current 0.25%.
TBS television, which cited no sources for its story, also said there is a growing view within the central bank that they should take more time to monitor economic conditions cautiously.
BOJ officials were not immediately available for comment.
Before the TV report, expectations of a BOJ rate hike this week did little to boost the yen. Even if rates were increased to 0.5 percent, they would still be the lowest in the industrialized world.
A wide array of market players have borrowed the low-yielding yen and used the funds to purchase higher-yielding currencies in carry trades, helping push sterling to an eight-year high against the Japanese currency.
The dollar, meanwhile, continued to move broadly higher. Expectations for near term U.S. interest rate cuts have been scaled back sharply in the past few weeks following the release of stronger-than-expected economic data.
"We continue to see the dollar trade firmly across the board. Basically, one of the prime catalysts has been what is going on with respect to U.S. interest rates," said George Davis, director and chief technical analyst at RBC Capital Markets in Toronto.
"We've seen 10-year yields break above 4.62% and basically move continuously higher. I think the fact that we've had very firm interest rates in the United States has been supportive of the U.S. dollar," he added.
The benchmark 10-year Treasury notes were yielding 4.75% today, down slightly from late Monday.
Most analysts now expect the euro to trade weaker against the dollar in the near term, with some projecting the currency trading around $1.26 in the coming weeks.
The dollar recovered losses against the Canadian dollar after the Bank of Canada on Tuesday left interest rates unchanged at 4.25%, as widely expected.
Also undermining the commodity-linked Canadian dollar was the drop in U.S. crude oil prices. U.S. crude futures slid to 18-month lows under $51 per barrel.