The dollar gained against the yen as crude oil pushed to new record highs above $70 per barrel on Tuesday, but the disruption Hurricane Katrina caused to US oil refining facilities capped the dollar's gains against the euro, analysts said.
"We are seeing some reaction to the higher price of oil here," said Andrew Busch, global foreign exchange strategist with Harris Nesbitt in Chicago. "The Japanese yen is still under the gun," he said.
Since Japan imports all of its crude, expensive oil is likely to put the Japanese economy - and the yen - under pressure.
The dollar hit a three week-high of 111.69 yen before paring gains to trade at 111.25 yen in late New York trade. Investors were also betting this week's slew of US economic data would boost the US currency.
The US dollar surrendered some gains against the euro and fell against the Canadian dollar partly because the hurricane halted most oil production in the Gulf of Mexico, some said.
"The dollar sell-off against the euro makes sense because it is primarily the US that is going to bear the brunt of the (oil refining) problem," Busch said.
The euro dipped below $1.2180, near session lows, in the wake of stronger-than-expected data on US consumer confidence earlier on Tuesday. However, by late New York trade it had partially recovered to trade around $1.2221, down 0.1 percent from late Monday.
The dollar popped up briefly after the report showed US consumers were much more confident than anticipated despite rising fuel costs. The Conference Board's US consumer confidence index rose to 105.6 in August, far above economists' median forecasts for 101.5.
"We are seeing dollar strength on higher consumer confidence in the face of higher oil and commodity prices," said Tim Mazanec, senior currency strategist with Investors Bank & Trust in Boston. "Consumers have been purchasing and holding up this economy and the dollar has been making gains on the back of that."
Oil prices remained high with NYMEX October crude settling up $2.61 at $69.85 a barrel, although it was down from an earlier peak of $70.85, as the petroleum industry assessed the extent of the damage from hurricane Katrina on the US Gulf Coast.
Traders said the yen also weakened partly because of turmoil in Indonesia whose currency, the rupiah, briefly plunged by almost 9 percent against the dollar to a four-year low because of fears of an economic crisis.
The rupiah has suffered as a rise in oil prices has worsened Indonesia's balance of payments and raised inflation expectations. It later retraced losses after the central bank hiked interest rates by 75 basis points to 9.5 percent and took measures to tighten money supply.
Sterling was down 0.5 percent to $1.7860 weighed down by Bank of England data showing the lowest rise in mortgage lending in three years in July.
Reaction was muted to the release of minutes from the Federal Reserve's August meeting. These showed most policy-makers were worried that inflation risks had "ticked up" recently, with some fretting that price increases were already at the upper end of their comfort zone.