The yen slipped to a record low against the euro on Wednesday as news North Korea test-fired at least seven missiles deepened recent losses from expectations that Japanese interest rates would rise only gradually.
The dollar benefited in a secondary reaction to North Korea's move, clawing back from an earlier one-month low against the euro in a wave of safe-haven buying.
The euro was also pressured as retail sales in the single currency zone unexpectedly fell in May from April and grew little in annual terms.
"The Korean issue is dominating today - the market's first reaction is to sell yen, it's second is to buy safe-haven currencies like the dollar," Westpac currency strategist Geoff Kendrick said. "This story may continue for a fair chunk of today before traders start to focus on something else."
The yen has been under pressure this week as investors expect the Bank of Japan to take its time raising interest rates, currently at zero.
Japan is expected to increase rates next week - its first tightening in six years - but that will still leave it far behind the ECB, which looks set to tighten further from the current 2.75 percent.
The yen fell to a low of 147.31 per euro, its lowest since the single currency was launched in 1999, before trimming losses to 146.68 by 1200 GMT. Against the dollar it was steady at 114.68 yen.
A wave of safe-haven buying after the North Korean missile launches pushed the Swiss franc briefly to a fresh eight-year high against the yen, while gold rose by more than 1 percent to a one-month high. The news also prompted a sell off in emerging market currencies, potentially supporting the US dollar.
Nato said the launches posed a "serious threat" to the region and beyond. RBS analysts said in a research note that underlying yen weakness was already well established.
"The expectation of a rate hike in July may moderate this, but government opposition to the hike remains voluble, and market pricing suggests risks for the yen remain to the downside, with a hike widely expected," RBS said.
The euro was steady on the day at $1.2791, with earlier losses trimmed slightly.
The European Union's statistics office said retail sales in the 12-country eurozone rose 0.8 percent from May 2005 but fell 0.6 percent month-on-month, dragged down mainly by Germany.
Overall, analysts say however that the euro should remain supported on speculation the European Central Bank could signal a quickening in the pace of monetary tightening when it meets on Thursday.
The ECB is seen leaving rates on hold after it hiked them by 25 basis points last month, but a recent run of strong data increased expectations for a rise in August.
"Euro/dollar is going to be all about the ECB over the next couple of days - the market is 50 percent priced for an August hike, the key will be whether or not Trichet uses the vigilant word tomorrow. If he does then the market could go a big figure up, if not, it could go a big figure down," Westpac's Kendrick said.
A survey showed growth in the eurozone services economy hit a six-year high in June and was perhaps nearing a peak, but strong inflation pressures also underlined the risk of faster interest rate increases.
In contrast, the Federal Reserve signalled it may pause its two-year tightening campaign after delivering a 17th straight rate increase last week.
Investors are focused on the June US payrolls report due on Friday, but will look at May factory orders due at 1400 GMT.
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