The yen was little changed against the dollar on Wednesday one day after a sharp rally, and traders appeared ready to resume selling the yen on expectations of more monetary stimulus in Japan.
The dollar has risen about 10 percent against the yen since mid-November. The yen staged a forceful recovery on Tuesday after the Bank of Japan disappointed investors who had hoped for aggressive easing actions.
Analysts said the yen's outlook remains bleak. The BoJ will remain under pressure to inject more stimulus into the economy, which will hurt the currency. Charts and positioning in the options market also pointed to medium-term yen weakness, with some betting on a move to 100 yen per dollar.
Paresh Upadhyaya, director of currency at Pioneer Investments in Boston, said a rise in the dollar in the second half of the year could add momentum to the yen weakness. "The U.S. economy is performing better than expected," said Upadhyaya. "U.S. yields will start to head higher and interest rates differential will move against the yen."
(Read more: Did the Bank of Japan Just Kill the Yen's Rally?)
The dollar was flat at 88.68 yen, retreating from a 2 1/2-year high of 90.25 yen set on Monday, according to Reuters data. It had declined 1 percent versus the yen on Tuesday.
The Canadian dollar tumbled after the Bank of Canada held its benchmark interest rate at 1 percent but pushed back the timing of any further interest rate increases. The U.S. dollar jumped 0.8 percent to C$0.9989.
"BOC has effectively pushed out their tightening date by at least six months," said Alan Ruskin, head of G10 FX strategy at Deutsche Bank in New York.
Sterling recovered from a near five-month low against the dollar after better-than-expected UK jobs data and minutes released from the Bank of England's last policy meeting cast doubt on the need for more monetary easing.
The was last little changed at $1.5844. The was also little changed against the dollar, at $1.3317, with traders citing technical factors and after the International Monetary Fund trimmed its 2013 forecast for global growth, partly due to the unexpectedly stubborn euro zone recession.
"There's a little bit of a reality check that's taking place in the market," Upadhyaya said. "That might be leading to a temporary pause in this risk rally."
Bearish on Yen
The euro fell 0.1 percent against the yen to 118.11 yen. The Bank of Japan said on Tuesday its open-ended commitment to buy assets would kick in only next year, disappointing those who had expected a faster, more aggressive move.
Analysts said a change in BoJ leadership in April is also expected to weigh on the yen, with the market expecting Prime Minister Shinzo Abe to appoint a governor favoring more aggressive monetary easing.
"There was obviously disappointment about the BoJ's measures. However, I don't see the moves the last three days as a reversal of the bullish trend in dollar/yen," said Vassili Serebriakov, currency strategist at BNP Paribas in New York. "We are still seeing a lot of interest in buying the currency pair, and we still expect further upside," he added.
Commerzbank in a note to clients said the dollar/yen has recently failed at 90.25 four times, suggesting "the near-term risk is for a slightly deeper retracement ahead of the next leg higher." The bank said its target remains 93.32.