The dollar fell to an eight-week low against the yen on Monday but rallied late in the New York session as traders, worried about continued Middle East instability and its potential impact on oil prices, remained cautious on the Japanese unit.
Rising crude costs had undermined the yen in the past, given Japan's full dependence on oil imports to power its industry-driven economy.
"Oil prices are still a concern and traders will be hesitant sending dollar/yen below 108 yen, because the catalysts for higher oil prices are still there - such as tensions in Iraq and Saudi Arabia," said Kathy Lien, chief currency strategist at Forex Capital Markets in New York
"Even though the natural course for the dollar/yen is lower and the Nikkei continues to rally, markets are hesitant to send the dollar/yen further down," she added.
The greenback also traded firmer against other major units, notably the euro, Swiss franc and sterling in generally quiet trading as investors took profits on their gains from these currencies last week, analysts said.
In late afternoon trade in New York, the dollar rose to 108.89 yen after earlier falling to an eight-week trough around 108.24 yen, according to Reuters data. The yen's early advance was fuelled by strong gains in Japanese equities overnight, along with expectations of a Japanese interest rate hike.
The euro fell 0.14 percent to 131.88 yen after touching a seven-week low earlier.
Against the dollar, the euro traded at $1.2110 down around 0.2 percent. The US currency gained 0.3 percent versus the Swiss franc to 1.2459 francs. Sterling, meanwhile, slipped to $1.8309.
"After the dollar got hit most of last week following a record US current account deficit coupled with violence in Iraq and Saudi Arabia, players are now looking to partially unwind their dollar shorts as they await tomorrow's ZEW (economic sentiment) survey out of Germany," said Ashraf Laidi, chief currency analyst at MG Financial in New York.
Short positions are effectively bets that a specific currency will decline. By unwinding short positions on the dollar, they are taking profits on other currencies.
"Traders are not going to do much except watch the France and England soccer games,' Laidi said. "The rest of the week, there isn't much in the way of data that are expected to be dollar-positive, except maybe a normalisation of the durable goods orders on Thursday, which may revert to positive territory," he added.
Wall Street economists polled by Reuters expect orders for US durable goods to rise 1.4 percent in May, from a 3.2 percent decline the previous month.
With respect to the yen, dealers said they were also focusing on Japanese government bonds, whose benchmark 10-year yield softened after hitting the highest level in nearly four years last week. Analysts said yields have been a key focus of debate about where Japanese interest rates are headed.
The dollar also reacted little to a statement in Paris on Monday by Federal Reserve Board Governor Ben Bernanke, who said US inflation would stabilise over the rest of the year.
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