The yen gained nearly 1 percent against the dollar on Monday as buying by Japanese investors before the current business year wraps up this week sparked a wave of short-covering.
The dollar also lost ground against the euro as traders waited to see whether the Federal Reserve would flag more credit tightening ahead after an expected interest rate rise at this week's two-day meeting ending on Tuesday.
The last-minute buying spree by some big Japanese financial institutions drove the yen up more than 1 percent against the battered Australian and New Zealand dollars, taking it to an 18-month high against the kiwi, traders said.
"This is the last wave of huge repatriation," said Noriyuki Kato, treasury manager at State Street Global Markets in Tokyo. "The market was surprised, but I'm not sure if you can justify a follow-through from here."
Hefty purchases of foreign bonds by yield-starved Japanese investors were one of the main drivers behind the yen's 13 percent slide against the dollar last year. Japan's fiscal year ends on Friday.
Speculation that China will allow the yuan to strengthen more against the dollar after a visit by two prominent US senators last week also spurred gains in the yen, which is often traded as a proxy for the Chinese currency, traders said.
The two senators, Charles Schumer and Lindsey Graham, are sponsors of a bill that threatens to slap China with a 27.5 percent tariff on its exports if Beijing does not allow the yuan to appreciate more substantially.
The yuan edged up to 8.0230 per dollar on Monday and has risen a little more than 1 percent since the Chinese currency was revalued last July.
The dollar shed 0.7 percent to 116.60 yen, sliding sharply from an intraday high of 118.50 on Friday. Overall the dollar has been trapped in a broad range between 115.50 and 119.50 over the past two months.
The euro retreated 0.6 percent to 140.50 yen but the single currency clawed up slightly against the dollar to around $1.2050 from $1.2035 late in New York on Friday.
The Fed begins a two-day meeting on Monday and is widely seen lifting rates to 4.75 percent from 4.5 percent in what would be the 15th straight increase, but more important are the clues the central bank gives on its actions beyond that.
At the January meeting, the Fed tweaked its statement to say further policy tightening may be needed but the central bank will respond to the changing economic outlook as necessary.
The dollar has been vulnerable to any evidence suggesting the Fed is set to soon stop lifting rates, especially as the European Central Bank has made clear its plans to keep bumping up rates and as the Bank of Japan moves closer to doing so before year end.
Data on Friday showing sales of new US homes plunged 10.5 percent in February, the biggest drop in nearly nine years, were the latest to raise doubts about the Fed outlook.
Futures on the fed funds rate reflect a roughly 75 to 80 percent chance the Fed will press on and raise rates to 5 percent at its May meeting, down from about 95 percent two weeks ago.
High-yield currencies came under fire again as investors expect their rate advantage to be eroded, with the New Zealand dollar taking the biggest hit as an economic slowdown stokes expectations of an eventual rate cut.
The kiwi hit a 22-month low of $0.6053 The New Zealand currency has plunged about 8.5 percent so far this month and more than 11 percent this year.
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