The dollar slid against the yen on Tuesday after a European Central Bank official fretted about the euro's strength and said Asian currencies should bear more of the burden of the greenback's broad weakness. "In terms of foreign exchange developments, we see at the European level the adjustment is completed and has even gone too far," ECB Chief Economist Otmar Issing said in a speech.
"The key to this problem ... lies in Asia and above all in China's hands, but China is not addressing this because of its internal problems," he said.
His comments swiftly pushed the dollar down to session lows against the yen at around 103.13 yen, and dragged the euro to intraday troughs against the Japanese currency at about 135.40, according to Reuters data.
Joe Francomano, director of foreign exchange trading at Erste Bank in New York, said Issing's comments were the catalyst to the yen's big moves against the dollar and euro.
"There was also a technical downward trade in the euro that was under way at the beginning of the year and Issing's comments complemented the move," he added.
Many Asian countries, most notably China, have kept their currencies artificially weak against the dollar during the greenback's three-year decline, which has been particularly sharp against the euro.
But if China loosens the peg of the yuan, currently fixed at 8.28 to the dollar, allowing the Chinese unit to rise, that should bolster other Asian currencies such as the yen against the dollar as well.
A break of the yuan's current peg with the dollar is expected to make Japanese exports more competitive and boost underlying support for the yen.
By late afternoon in New York, the dollar was trading at 103.28 yen, down about 0.8 percent from levels late on Monday.
The euro traded nearly 0.2 percent higher against the dollar at around $1.3109.
"I think (the impact of) any ECB comment has been short-lived. Between (ECB President Jean-Claude) Trichet and Issing, their comments have an immediate effect, but not a long lasting one," said Firas Askari, head of foreign exchange trading at BMO Nesbitt Burns in Toronto.
"The euro could easily jump back up to highs again, though I wouldn't be surprised to see a retracement to $1.28, which is not that significant from a long-term point of view," he added.
The dollar was up against the Swiss franc at 1.1828 francs. Sterling rose to $1.8778.
Analysts were also keenly awaiting Wednesday's US trade data as this could be a litmus test for dollar sentiment. A Reuters poll forecast the US trade deficit for November to narrow to $54.0 billion from a record $55.46 billion in October, as a weaker dollar and cheaper oil more than compensated for sluggish foreign demand.
Earlier, markets took advantage of a German ZEW institute survey showing investor confidence improved by more than expected in January and bought euros, as traders grew concerned about the impact of the trade figures on the dollar.