The dollar hovered near a six-month low against the yen on Friday on worries about the strength of the US economy and the effect on currencies of a rate rise in China.
Markets were taken by surprise on Thursday when China's central bank announced it would raise rates, in an effort to cool its red-hot economy.
The yen and commodity-exporting currencies such as the Australia dollar initially sank on worries that slower Chinese growth would hurt their economies, giving the dollar a lift. But with analysts divided over which economy, including the United States, would be hurt the most from a possible slowdown in China, many traders said it was too early to draw any conclusions.
"The market doesn't know how this China issue will affect currencies," said Mitsuo Imaizumi, deputy general manager of the international bond and forex department at Daiwa Securities SMBC.
Also under pressure from end-month selling by Japanese exporters, the US currency fell as low as 105.97 yen, just above a six-month trough of 105.90 hit on Thursday. It was at 106.09/12 yen.
The euro stayed in a tight range on Friday, trading at $1.2756 slightly higher compared with late US levels.
On Tuesday, it hit an eight-month peak around $1.2840, less than a cent off a record high of 1.2930 scaled in February.
Dealers said the low of 105.90 yen would likely be tested later on Friday, as many in the market were keen to challenge the resolve of Japanese policymakers, who are widely believed not to have intervened in currency markets since March.
The Japan's Ministry of Finance will release intervention figures for October at 1000 GMT.
Finance Minister Sadakazu Tanigaki reiterated on Friday that the authorities would act if currencies moved out of line with economic fundamentals.
China increased in its benchmark one-year yuan lending rate to 5.58 percent from 5.31 percent.
Analysts said that it was uncertain what impact the move would have on Beijing's timetable to increase the flexibility of its currency.
China's yuan trades in a narrow band at around 8.28 to the dollar and is widely believed to be undervalued. Beijing has been under pressure from the United States and, increasingly, Europe, to adopt a more flexible currency regime.
A revaluation would likely support the yen and other Asian currencies, analysts say.
Traders were also keenly awaiting Tuesday's US presidential election, with polls still showing a close race between President George W. Bush and Democratic challenger John Kerry.
The yen hardly moved after the Bank of Japan's Policy Board decided to maintain its current monetary easing policy, as widely expected.