The yen jumped against the dollar and the euro on Tuesday after ratings agency Standard & Poor's revised its rating outlook for Japan to positive from stable.
The news hit the market as the dollar struggled to extend gains after hitting a two-week high against the yen on Monday and investors grew nervous about how long a sell-off in emerging markets and stocks would continue.
"The yen's jump on rating news underscores how volatile the market is and how speculators are leading the trading, taking advantage of a lack of direction and a lack of major news," said Hideki Hayashi, global strategist at Shinko Securities.
Immediately after the S&P announcement the yen darted up 0.4 percent to the day's high around 111.00 per dollar and rose 0.3 percent to around 142.90 per euro.
But yen buying lost some steam as short-term dealers took profits on bets against the dollar while Japanese mutual funds bought the US currency at its lows, traders said.
The Japanese currency traded around 111.15 yen up from near 111.55 yen in late New York trade. The yen hit a two-week low of 112.95 per dollar on Monday.
The euro was at 142.95 yen, down from around 143.55 yen late on Monday.
While the market's main focus remained on whether the Federal Reserve will raise interest rates again in June, heightened volatility across assets has caught the attention of investors in the past two days, propping up the dollar.
Some traders say that a large-scale shifting of funds out of high-risk assets such as shares in emerging economies and commodities could be positive for the dollar, given that US Treasuries are often bought as safe-haven assets.
Indian share prices tumbled more than 10 percent at one point on Monday, while stocks in some Latin American countries posted their biggest losses in years.
The euro was little changed at $1.2860 after rebounding sharply from a low of $1.2692 on Monday.
Reflecting the asset volatility, gold plunged almost $100 from a 26-year high before rebounding on Monday.
On Tuesday in Asia, gold rose as much as 1 percent to above $663 up from a one-month low of $636.20 marked the previous day.
Gold and the dollar tend to move inversely to each other.