The yen rose on Tuesday after comments from Bank of Japan Governor Toshihiko Fukui suggested Japanese interest rates could go up soon, lifting the South Korean won half a percent and propping up some other Asian currencies.
But weakness in stock markets weighed on some currencies, including the Taiwan dollar and Indonesian rupiah.
The Asians had been weak in early deals, undermined by the view that US rates would be raised at least twice more in coming months. Expectations that inflationary pressures would lead to a 17th consecutive rise in US rates in June and possibly further tightening in August have supported the dollar this week, displacing fears that higher rates could slow US growth.
But Fukui's remarks in a speech that monetary policy changes should be made early, if warranted by economic conditions, heightened speculation that Japanese interest rates could be lifted from virtually zero in July. That caused the yen to rally nearly one percent against the dollar from Monday's eight-week low of 115.78.
"Fundamentally, dollar/yen and euro/yen should be lower, particularly as yen rates begin to pick up. That's what we saw today," said Deutsche Bank currency strategist James Malcolm.
But the weakness in Asian stock markets had most traders worried. Taiwan's main stock index fell more than 3 percent, while stock markets in South Korea, Singapore and Thailand shed nearly 2 percent each.
Malcolm said even though foreign selling of Asian stocks since early May seemed to have waned, it was too early to say sentiment on emerging markets had improved and that investors were returning to riskier assets.
"We are modestly positive on Asia but not wanting to do a whole lot just yet," Malcolm said, adding he would stay with structurally sound currencies such as the Malaysian ringgit for now.
The Indonesian rupiah initially shed half a percent, falling to the weaker side of 9,400 per dollar, but it pared its losses and traded around 9,375/9,385. A Jakarta-based rupiah trader said the currency's under-performance was related to demand for dollars from state oil firm Pertamina and other importers. "There is still hot money in Indonesia and concerns that this will be withdrawn are there," he said.
The central bank had intervened to defend the rupiah last week but had not done so this week as yet, he said.
Elsewhere, the Thai baht rallied more than a quarter of a percent despite the weakness in Thai stocks. The government released data showing Thai exports in May rose 18.8 percent from May last year. The Singapore dollar rose almost a cent from Monday's two-month lows on the weaker side of 1.6000 per US dollar.