The dollar and euro fell against the yen on news that European finance ministers will push for a more forceful message at next's month G7 meeting on the need for a stronger Japanese currency.
Euro zone finance ministers on Monday will draft the European position for the meeting of the Group of Seven major industrial nations, a source told Reuters.
The yen's rebound began even before the report as investors in Asia and Europe unwound bets against the currency, which had slumped to multiyear lows against the euro, sterling and Australian dollar in a recent selloff. That prompted a bout of profit-taking in other currencies.
"We saw some sharp moves in the yen as a result of that news. But really the rally in the yen started way earlier," said Ashraf Laidi, chief currency analyst at CMC Markets in New York.
"But this next G7 meeting would be very interesting. I would expect some gains or stability in the yen ahead of that meeting and that could prevent the dollar from rising to 122.50/60 yen," he added.
Until today, the yen had been under pressure since the Bank of Japan left rates unchanged last week. Investors often push down lower-yielding currencies, such as the yen, by borrowing in them to buy assets in countries with higher returns.
CMC's Laidi noted that the rally in the yen started in Asia after an unexpectedly low Australian inflation report significantly curtailed the chances of a February rate hike by the Reserve Bank of Australia. The Australian dollar, with interest rates of 6.25%, is one of the more favored
currencies to buy in carry trades.
"When the inflation data came out, people sold the Aussie against the yen and that spilled over to other yen crosses," he added. The Australian dollar fell more than 2% percent to 94.36
yen.
It doesn't help that short positions -- bets a currency would weaken -- on the yen were at extreme levels, analysts say.
"Short positions on the yen were so extreme that we were bound for a rally in the currency," said Nick Bennenbroek, senior FX strategist at Brown Brothers Harriman in New York.
Some analysts, such as Alan Ruskin at RBS Greenwich Capital Markets, said news Europe will seek a stronger message from G7 nations on the weakness of the yen is not a "complete surprise." However it may be "disingenuous" for the G7 to be pleading the case for a stronger yen based on economic fundamentals.
"Interest rates reflect fundamentals and are the obvious key driver of yen weakness," Ruskin said in a note to clients. "If European officials are to be consistent they should really be calling for higher yen rates."
The yen also rose against sterling. Minutes of the Bank of England's latest meeting showed a 5-4 vote for this month's UK rate rise to 5.25%, compared with market expectations of a 7-2 vote.
Sterling was down more than 1% from Tuesday's 14-year highs of 241.49 yen. It was also down versus the dollar.