Political instability in Taiwan, weaker Japanese share prices and rumours that al Qaeda's second-in-command had been killed all helped to boost the dollar against the yen on Monday.
But analysts said that Israel's killing of the spiritual leader of the Hamas Islamic militant group could cast a shadow over the dollar when European trading hours kick in.
"It's a real tricky situation, it (the killing) could drive the dollar in either direction," said Mitsuru Saito, general manager at UFJ Tsubasa Securities.
"Some may take it as a dollar-positive factor amid progress the United States is making in pursuing al Qaeda, while others may dump the dollar as the killing is likely to trigger serious and wider-spread anti-US sentiment in Arab nations," he said.
Israeli helicopters killed Sheikh Ahmed Yassin as he left a mosque on Monday in Israel's highest profile assassination of more than three years of conflict.
The dollar was trading around 107.30 yen slightly off the day's high of 107.65 yen, which was up nearly one percent from 106.65 in late New York on Friday.
The euro was trading at $1.2266/71 trimming losses from the day's low of around $1.2225.
The dollar was at 1.2700/10 Swiss francs up from 1.2694/02 in late US trade on Friday.
While dealers in Tokyo were waiting to see how European traders would react to the day's events, some showed disappointment about plans by Japan's giant state pension fund to invest less money in financial markets this year than last year.
Many in the market had expected the government to put more into foreign bonds.
The Government Pension Investment Fund said it would allocate 5.8 trillion yen ($54.28 billion) of new money in financial markets in the next fiscal year starting in April, half of its planned 12.1 trillion yen investment this year.
The yen was battered by post-election instability in Taiwan.
The Taiwan dollar and Taiwan stocks were shook after President Chen Shui-bian was narrowly re-elected on Sunday after surviving an assassination attempt. The political opposition called for a recount, however, casting the result in doubt.
"There are geopolitical tensions all over the place today but what affected the yen was political instability in Taiwan," said Junya Tanase, forex strategist at J.P. Morgan Chase in Tokyo.
"Foreign investors are sensitive to political turmoil in Asia, and uncertainty in Taiwan and South Korea's impeachment dispute have put a cloud over Asian currencies, also pressuring the yen," he said.
The South Korean parliament voted to unseat President Roh Moo-hyun earlier this month.
Taiwan's main stock index dived 6.68 percent, while Tokyo's Nikkei stock average ended the day down 0.88 percent.
Talk that al Qaeda No 2 Ayman al-Zawahri may be among those surrounded near the Afghan border was dismissed by the Pakistani army as "conjecture" on the weekend. Reuters was unable to confirm Monday's market talk that he may have been killed.
But analysts said it was only a matter of time before the dollar tested 105 yen, under pressure from fading hopes of an imminent US interest rate hike and speculation that Japanese authorities are weakening their stance on intervention.
Signs that Japan had stepped back from buying dollars to weaken the yen knocked the US currency off five-month highs last week. It tumbled about five percent from around 112.34 yen touched on March 8.
Looking ahead, domestic and foreign fund managers were awaiting Japanese land price data for 2003, due at 0800 GMT.
Recent data suggests that land prices are starting to bottom-out after a long slump that began when the nation's property bubble popped in 1991.
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