The dollar slipped against the yen on Tuesday after comments by Bank of Japan Governor Toshihiko Fukui suggested the BoJ would lift interest rates in coming months despite a flap over his links to a disgraced fund manager.
Fukui said in a speech that monetary policy decisions should be made early but in a gradual manner, reinforcing market expectations for a rate rise from zero as early as July.
He added that political pressure would not affect policy decisions, and his investment in a fund set up by Yoshiaki Murakami, who is under arrest for suspected insider trading, would be unrelated to policy decisions. "The yen was bought and the dollar was sold on the remarks as it shows that his stance (on monetary policy) is unchanged," said Ryohei Muramatsu, a manager in charge of treasury at Commerzbank.
There had been some market speculation that the flap over Fukui's $87,000 investment in Murakami's aggressive equity fund might make the BoJ more susceptible to political pressure and push back the timing of a rate increase by the central bank.
Fukui's investment was made in 1999 when he was employed in the private sector, but he has been criticised for keeping his money invested after he became BoJ governor in 2003.
Most analysts believe Fukui will ride out the storm over his investments since top government officials, including Prime Minister Junichiro Koizumi, have declared their support for the BoJ chief.
Although a recent sell-off in Tokyo shares has also fuelled some uncertainty, the BoJ is still widely expected to raise rates from virtually zero in July or August, with Japan's economy posting a solid expansion.
The dollar was at 115.05 yen, down from around 115.45 yen just before Fukui's comments came out in the afternoon in Tokyo. It hit an eight-week high of 115.78 yen on Monday.
The euro also dipped to 144.75 yen from around 145.30 yen in late US trade. It climbed as high as 145.86 yen on Monday, its strongest since the single currency was first launched in 1999.
Against the dollar, the euro edged up to $1.2585 off a seven-week low of $1.2530 struck last week. The yen had languished ahead of Fukui's comments as market players looked to see if North Korea would soon test a long-range ballistic missile. Officials believe North Korea has already fuelled a missile for a test fire.
The threat of a missile launch has drawn harsh warnings from Washington and Tokyo and would likely spark selling of the yen and other Asian currencies, analysts said.