The yen slipped from this week's one-month highs versus the dollar on Friday as investors locked in profits after upbeat price data cemented expectations for a near-term monetary policy shift in Japan.
The euro stepped back from a one-month high set on Thursday after hawkish comments from European Central Bank President Jean-Claude Trichet, with investors awaiting a US non-manufacturing survey and consumer confidence data.
Japan's core consumer price index rose 0.5 percent in January from a year earlier, the biggest annual increase in nearly eight years and above the market consensus.
Armed with the data, the BOJ is expected to scrap its super-loose "quantitative easing" policy, possibly as soon as its meeting ending next Thursday. But even after such a move overnight rates are seen holding close to zero.
"The market has been shifting expectations for an end of quantitative easing policy from April to March for a couple of weeks. What we are seeing now is buy the rumour, sell the fact," said Adarsh Sinha, currency strategist at Barclays Capital.
"The CPI was higher than expected but was in line with the BOJ forecast. But the end of the quantitative easing policy is not necessarily positive for the yen because the zero interest rate policy will be maintained for 3-6 months."
By 1230 GMT, the dollar was up 0.5 percent at 116.41 yen, rebounding sharply from a low of 115.57 yen after the currency pair failed to break through chart support around 115.50 yen immediately after CPI data.
The euro hit a one-week high of 140.22 yen after touching a low near 139.17 yen earlier in the session.
The euro was down 0.1 percent at $1.2024, barely reacting to a strong eurozone services sector survey.
The Purchasing Managers' Index for the currency bloc's services sector rose to 58 in February from 57.0, above the forecast and its highest since September 2000.
The single currency hit a one-month high of $1.2045 on Thursday after hawkish comments from European Central Bank President Jean-Claude Trichet after the bank's decision to raise rates to 2.5 percent.
Investors see the central bank pressing on with more credit tightening and now they are warming to the view interest rates may rise above 3 percent by the year-end.
Bank of Japan sources told Reuters the rise in the core consumer price index was within expectations, adding that CPI excluding fresh food, petroleum and other volatile products probably rose only around 0.1 percent in January on the year.
The BOJ is expected to start phasing out its current policy of flooding the banking system with excess reserves in a step-by-step process while holding the overnight call rate at virtually zero during the process.
Opinions are divided as to when the BOJ will start the process of shifting away from the current framework and start raising interest rates.
Some expect the BOJ would wait to see a closely-watched "tankan" survey of business sentiment, due on April 3, before embarking on a policy shift.
In a Reuters poll of 31 market players taken after the CPI data, about half of them expect a BOJ policy shift next week. The rest of them expect a move in April, partly because some government officials remain unimpressed by the CPI data.
Japanese prime minister Junichiro Koizumi, finance minister Sadakazu Tanigaki and top government spokesman Shinzo Abe said on Friday that Japan had not yet overcome deflation.
"Given the market seems too optimistic on its BOJ policy outlook, the yen is vulnerable to the downside should the BOJ leave monetary policy unchanged next week," J.P. Morgan said in a note to clients.
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