The dollar hovered near a two-month high against the yen on Friday ahead of an expected bump up in US interest rates next week and on caution over the fate of Bank of Japan Governor Toshihiko Fukui.
With the market suffering from a vacuum of significant economic data leading up to the Federal Reserve's rate decision, trading was prone to speculative deals and an overreaction to rumours.
The yen's outlook remained clouded due to the controversy over Fukui's investment years ago in an equity fund run by a financier who was indicted on Friday on suspicion of insider trading.
Although Prime Minister Junichiro Koizumi and cabinet ministers have strongly backed the BoJ chief, the yen has come under pressure this week from persistent speculation that Fukui may resign over the issue.
Fukui was grilled by lawmakers again on Friday and reiterated that he wanted to stay in his post. "I think the government side wants to quickly put an end to this issue, but it looks like it could drag on," said Daisuke Uno, market strategist at Sumitomo Mitsui Banking Corp.
Key to the yen's weakness are concerns that the fuss over Fukui could affect the timing of an interest rate hike, though recent comments by BoJ officials have dovetailed with market forecasts for the central bank to boost rates from near zero as early as July.
"Even if he were to step down, the BoJ would probably stay on track to normalise monetary policy, so it shouldn't have a long-term impact on the market," said Tohru Sasaki, chief forex strategist at J.P. Morgan Chase Bank in Tokyo.
The dollar was at 116.05 yen edging down from late US trade on Thursday, when it shot up over 1 percent.
The euro slipped to 145.90 yen from around 146.05 yen in late US trade.
Against the dollar, the single European currency was little changed at $1.2575
The dollar rose to a two-month peak of 116.29 yen on electronic trading platform EBS on Thursday, while the euro powered to a record high of 146.30 yen.
The dollar was buoyed on Thursday by rumours that Fed officials, possibly including Chairman Ben Bernanke, had met with bond market participants on Wednesday.