The euro hit a record high against the yen on Monday as eurozone interest rates looked set to rise while uncertainty remained over Japan's interest rate outlook. A stronger-than-expected eurozone manufacturing sector survey supported the view that the European Central Bank could accelerate the pace of interest rate hikes.
The yen hit a three-week high against the dollar after an upbeat reading in the Bank of Japan's quarterly tankan business sentiment poll which raised expectations for a July rate hike, but it quickly slipped back as government officials urged the BoJ to keep its zero interest rate policy.
There is also uncertainty over the future of embattled BoJ Governor Toshihiko Fukui who is under pressure to resign over his personal investments in a scandal-tainted equity fund.
"The market continues to worry about Fukui's position...If that uncertainty remains in the market, it's hard for the yen to rally because investors are concerned that the Bank of Japan may not raise interest rates as quickly," said Mansoor Mohi-uddin, chief currency strategist at UBS. "They (the politicians) are trying to reassert their position that they would like to see the BoJ being very slow in raising interest rates, so that doesn't help the yen either. The euro had risen as high as 146.99 yen, its highest since the single currency was launched in 1999.
Against the dollar the yen was down 0.3 percent at 114.80. The euro had hit a there-week high of $1.2808, fuelled by its rally against the yen.
Traders said potential for big moves was limited with investors unwilling to take extreme positions ahead of the US Independence Day holiday on Tuesday. The US Institute for Supply Management's manufacturing index for June is due at 1400 GMT, which is expected to edge up to 55.0 from 54.4 in May.
The tankan survey showed a headline diffusion index of plus 21 in the June tankan, a tad below forecasts but up from plus 20 in March and making it more likely the BoJ will raise interest rates from zero at its two-day policy meeting on July 13-14. In a Reuters survey conducted after the release of the tankan, 32 out of 41 analysts and traders said they expected a July rate increase. Japanese top government spokesman Shinzo Abe said the BoJ should continue its policy of zero interest rates to support the economy and said it needs to work with the government to ensure deflation is beaten.