The yen rose on Thursday on official comments about an end to the Bank of Japan's ultra-easy monetary policy, while the euro inched up on speculation German politicians might enter a grand coalition.
Bank of Japan Governor Toshihiko Fukui said the chances of a policy shift by the central bank would increase in the financial year starting April 2006.
German conservative leader Angela Merkel said on Thursday that a grand coalition with the Social Democrats was more likely than other possible coalitions.
German Chancellor Gerhard Schroeder and Merkel voiced optimism on Wednesday about forging a power-sharing coalition and ending political stalemate in Europe's largest economy, despite differences over who should head the government.
"The yen has had a little bit of a lift from Fukui's comments, and German politics may be helping the euro at the margin," said Derek Halpenny, currency economist at Bank of Tokyo-Mitsubishi.
"Before the election, a grand coalition was being seen as the worst-case scenario, and now it is being seen as something good."
By 1140 GMT, the euro was up 0.15 percent against the dollar at $1.2054, while the dollar was down 0.16 percent against the yen, trimming earlier losses to trade at 112.86 yen.
Sterling hit a three-week low against the euro of 68.35 pence after the UK Nationwide house price survey for September showed house price inflation at a 9-year low.
Analysts said the rebound of the single currency, after its dip below the key $1.20 level against the dollar this week, and stabilisation of US bond yields, could mean that the market may be consolidating for now.
Talk that Asian and Middle Eastern central banks are buying euros below $1.20 was also discouraging euro selling, they added.
"We are in a range - when the euro gets down to the area around $1.20, we see central bank demand picking up," said Michael Klawitter, senior currency strategist at WestLB in Duesseldorf.
German seasonally adjusted unemployment rose 39,000 in September, but only because of a statistical change, Germany's Federal Labour Office said on Thursday.
The dollar rallied to two-month highs against the yen and European currencies earlier in the week after Federal Reserve officials said they were worried about inflationary pressures picking up and signalled that US rates would head higher.
US interest rate futures are discounting rates of 4.25 percent by year-end, compared with current rates of 3.75 percent, following last week's quarter-point hike.