The dollar hit a four-year high against the yen today as expectations of strong U.S. economic data this week supported the view that the Federal Reserve may not have to cut interest rates in the near future.
But the U.S. currency slipped against the euro as dealers positioned themselves for the latest Fed statement on policy due on Wednesday.
While a move in the federal funds rate from 5.25% is not expected, the market will be watching for any hint on the course of U.S. monetary policy.
"The big question is whether they give any hints about adopting a neutral bias or keeping a tightening bias," said Ezechiel Copic, currency analyst at IDEAglobal in New York.
"That's where you'll see people parsing words and hanging on phrases," he added.
Traders still expect the European Central Bank to raise interest rates later this year, and that was helping support the common currency.
The Fed has kept U.S. rates steady since August, but repeated warnings about upside inflation risks and a recent bout of firm U.S. housing and manufacturing data have eroded expectations that its next move could be a rate cut.
"Instead of building in a 25-basis-point cut from the Fed, the market now is slowly turning away from that and even saying there could be a tightening. It will take very little to start pricing in a tightening now," said Adam Myers, currency strategist at UBS in London.
Predictions for higher Japanese interest rates, meanwhile, have receded after soft Japanese data, providing a "carry trade" opportunity for investors looking to borrow low-yielding currencies, buy higher-yielding ones and profit on the spread.
With Japanese inflation coming in below expectations last week and retail sales numbers for December showing a year-on-year decline today, the Bank of Japan may find it difficult to justify a rate hike at its February meeting.
"Overall negative sentiment on the yen, along with the carry trade, keeps it weakening," said Camilla Sutton, currency strategist with Scotia Capital in Toronto.
The euro rose 0.6% to a session peak at 157.99 yen, not far from last week's record high above 158.60.
The euro also hit an eight-year high at 1.6245 Swiss francs, according to Reuters data. A move above 1.6303 francs would mark the highest level since the euro's launch.
Like the yen, the Swiss franc has also served as a favored funding currency for carry trades, thanks to low Swiss interest rates.
"The underlying flow and trends are still in the carry trades," said Jay Meisler, principal of Global-view.com.
The Australian dollar -- the rare high-yielding currency that has weakened of late -- , continued to soften after inflation data last week slashed the market's expectations of further monetary policy tightening by the Reserve Bank of Australia.