The yen strengthened amid increased investor concerns that Group of Seven finance ministers may take a tougher line on the Japanese currency's recent weakness at their upcoming weekend meeting.
The dollar generally traded higher after a key measure of the U.S. services sector came in stronger than expected though gains were muted with investors taking some details in the
report as not being completely dollar positive.
With the U.S. services sector data out of the way, traders have resumed buying the yen in the run-up to the G7 meeting to be held in Essen, Germany. Investors are eyeing the G7 meeting on Friday and Saturday since European officials have been pushing for discussion of the yen's weakness.
However, the euro zone's counterparts in the U.S. and Japan have played down the issue.
"The Japanese yen is gaining support due to event risks ahead of the G7 finance ministers' meeting," said Alex Beuzelin, senior market analyst at Ruesch International in Washington.
"But with the meeting itself not expected to result in any tangible change with respect to the weak yen, its gains are likely to be temporary and its upside limited," he added.
The euro fell as low as 155.47 yen, according to electronic trading platform EBS.
The single currency has hit record highs against the yen in recent sessions, upsetting European officials who have complained that the yen's weakness gives Japan's exporters an unfair competitive advantage over euro zone products.
The yen extended its gains after comments from Eurogroup Chairman Jean-Claude Juncker on Monday, who said G7 ministers will certainly discuss the yen's foreign exchange rate.
But asked if the yen would feature in the G7 communique issued at such meetings, Juncker said it was still too early to say.
Some analysts cited speculative positioning on the yen as reason for Monday's rally as last week's data showed speculators held a record net short position on the yen in the International Monetary Market.
This may lead to a gradual reversal in the yen this week ahead of the G7 meeting, analysts said.
Extreme net short positions in a currency often suggest that a reversal in price action is imminent because dealers might be uncomfortable about keeping such a large position open.
"We are seeing slippage in yen positions with a lot of people easing out of their short positions," said Joe Francomano, vice president for foreign exchange at Erste Bank in New York. "The technical carry trade has also run into resistance with people trying to drip their way out of it in all the crosses."
The yen was also up 0.5% against the Canadian dollar, 0.7% against the Swiss franc and 1.1% against the pound, according to Reuters data.
The dollar earlier held firmer after the Institute for Supply Management's non-manufacturing index in January rose to its highest level since last May and above the Wall Street consensus forecast.
"Details of the report are not as dollar positive as the headline number suggests. Of the 10 sub-components, deterioration was seen in six," said Kathy Lien, chief strategist at DailyFX.com.
"As a result, the data's further impact on the dollar should be limited," she added.