The yen weakened on Monday as risk appetite improved with the rise in oil prices and Japan, set to host a G7 meeting later this week, again signaled its willingness to intervene in the market to weaken its currency.
U.S. crude futures were up as much as 3 percent on the day, driving a rally on Wall Street and pushing Treasury yields higher. Gains in these markets meant less flows for safe-haven currencies such as the yen.
On top of the risk market rally, Japan threw another intervention warning on Monday, which tends to pressure the yen.
Masatsugu Asakawa, Japan's vice finance minister for international affairs, told the Nikkei newspaper that G7 and G20 countries had discussed how to deal with disorderly currency moves, indicating a shared understanding that interventions were justified in such cases.
"While no action by Japanese officials is likely ahead of a G7 meeting this weekend, the fact that (Japan's) inflation and inflation expectations remain near historical lows suggest that some action is likely," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
Asakawa told Reuters that Japan would not be bound by a recent U.S. Treasury report on currencies that appeared to warn against unilateral intervention.
In late trading, the dollar rose 0.32 percent versus the to 108.95 yen. Since hitting an 18-month low versus the yen early this month, the dollar has rallied more than 3 percent.
The dollar index fell 0.06 percent to 94.55, after two straight days of gains. The index edged lower after a weaker-than-expected reading of New York's Empire State survey.
The greenback rose to a two-week peak last week, benefiting from recent upbeat data that showed the U.S. economy gaining momentum in the second quarter.
Investors are now focused on the release on Wednesday of the minutes from the Federal Reserve's last policy meeting in April for clues as to the timing of its next rate hike. The U.S. central bank hiked rates in December for the first time in nearly a decade.
"Market pricing has almost completely discounted the possibility of a rate rise in June, but in reality this is a live meeting that should not be ruled out for a hike," said Ranko Berich, head of market analysis at Monex Europe in London.
Berich said the latest U.S. labor market data, which supported the idea of diminishing slack and rising cost pressures, as well as higher crude oil prices pointed to "plenty of upside inflation risk."