The dollar rose against the euro and neared a four-year peak against the yen after G7 officials wrapped up a weekend meeting without singling out the Japanese currency's persistent weakness as a threat to global financial stability.
The yen hit a record low against the euro after the G7's statement, which called on investors to consider Japan's strengthening economy and be wary of one-way bets in foreign exchange.
However, the statement did not specifically address the yen's role as a funding currency in carry trades, in which the Japanese currency has been dumped in favor of higher-yielding units like the euro and the Australian dollar.
The yen recovered somewhat in North American trade, and with the G7 meeting out of the way, some analysts said the key event for the forex market this week would be fourth quarter Japanese gross domestic product data due Thursday.
"The coming Japan GDP release for Q4 and its potential impact on BOJ policy will do far more to impact the yen than any G7 platitudes," said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut.
A strong growth reading would likely raise the chances that the Bank of Japan will raise interest rates from the current level of 0.25% at its next policy decision on Feb. 21.
The dollar was up slightly in afternoon trading after rising as high as 122.09 yen, a breath away from a recent four-year peak at 122.19 yen.
The euro briefly touched 159.00 yen, the highest level since the common currency's 1999 launch, but subsequently backed off.
"We're seeing a bit of a position adjustment, as some people have concluded that a euro-yen rate at 159 may be a bit rich," said John McCarthy, director of foreign exchange at ING Capital Markets in New York.
The euro was down around 0.3% against the dollar. Traders said hawkish comments from Federal Reserve officials on Friday that pushed U.S. Treasury yields higher also helped the greenback, reflecting reduced chances of a near-term rate cut.
If Fed Chairman Ben Bernanke sounds a similarly hawkish tone and focuses on inflation risks in semi-annual testimony to Congress on Wednesday the dollar may extend those gains, analysts said.
The Australian dollar was a notable loser today after the Reserve Bank of Australia cut its inflation forecast for 2007, leading investors to scale back expectations that the central bank will raise interest rates in coming months.