The dollar rose slightly on Monday ahead of a US Federal Reserve meeting this week, which is widely expected to raise rates and where the market will focus on signals of future policy intentions.
The yen softened to 110.15 per dollar in opening trade and then steadied around 110. The euro slipped towards $1.2150 before recovering to be almost square on the day. Trade was thin as Tokyo markets were closed for a national holiday.
The market is pretty much unanimous in expecting the Fed to raise the federal funds rate by 25 basis points after Tuesday's meeting, following rises in June and August. The expected increase would lift the rate to 1.75 percent.
More important for the market is what the Fed signals on the outlook for rates.
"I do think that if the Fed is even modestly hawkish in its statement that the yield curve will at the least rise, possibly even steepen," UBS currency strategist Bhanu Baweja said.
"Both are positive for the dollar." Further US rises later this year had been widely anticipated until recent data cast doubt on the strength of the economy and now there is a growing feeling that the Fed could pause after this week's rate rise.
"I would actually see the risks of a pause being indicated in the statement as being significantly beneath what the markets are pricing in just now," said Robert Rennie, Westpac Bank's chief currency strategist, pointing out that rates were still low.
Baweja said beyond the Fed meeting, US figures on existing home sales and durable goods orders, both due on Friday, would be important in determining near-term dollar direction.
"If durable goods orders continue to decline, then that tells me that the one bastion of support that I thought would kick in for the US economy is probably under-performing," he said.
If the Fed did point to further rate rises, the dollar could strengthen further this week. However, gains against the yen may be limited ahead of a Group of Seven meeting in early October, on expectations the leading industrialised nations will push for Asia, and China in particular, to accept stronger currencies.
That would leave the euro to bear the adjustment, and after its rebuff at $1.23 earlier this month, it has room to fall.
"The risk is we continue lower through this week, and I certainly think $1.21, sub-$1.21 is fairly likely," Rennie said.
National Australia Bank strategist John Kyriakopoulos said there had been some talk about Bank of Japan intervention to cap yen gains after recent data raised concerns about the outlook for the Japanese economy.
"The risk of intervention-type flows are very low in our view until dollar/yen trades towards 105, an outcome with a low probability in the near term," he said.
The yen last traded at 105 per dollar in April, and has traded in a 108.70 to 110.70 range over the past month.
One factor that could temper Asian currency strength ahead of the G7 meeting is higher oil prices.
Oil jumped nearly four percent on Friday and was heading towards $46 a barrel on Monday, on worries hurricanes could delay US stock-building before winter.
Asia is highly dependent on imported oil - Japan, for example, imports all of its oil - and high prices raise worries about the impact on growth and inflation.
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