The yen hit a fresh record low against the euro on Monday, with expectations that the Bank of Japan will take its time raising interest rates weighing on the Japanese currency across the board.
The yen extended losses after falling across the board late last week as a smaller-than-expected rise in the consumer price index (CPI) reinforced the view that Japanese interest rates will climb only gradually, which triggered a wave of yen selling.
"The CPI report showed that the rate factor remains a big mover in the market," said Kikuko Takeda, currency analyst at Bank of Tokyo-Mitsubishi UFJ.
"The question is whether the data has done anything to change Japan's rate scenario, and I think it will be very difficult for the BOJ to change its position just on Friday's figure."
The BoJ has held fast to its position that it will take its time in raising rates, having lifted the overnight call rate in July for the first time in six years.
A Reuters poll taken after Friday's inflation data showed eight out of 20 market participants expected the BoJ to raise interest rates by the end of the year, while five said they expected the central bank to wait until the January-March quarter before doing so.
"Following the CPI report, the market has started to doubt the BoJ will boost rates again before the year-end," said a dealer at a Japanese bank. "That kind of view certainly is an incentive to sell the yen."
The outlook for the BoJ's monetary policy has kept sentiment damp for the yen, especially against the euro as the European Central Bank is seen raising rates further before the end of the year after it lifted the key rate to 3 percent earlier this month.
The euro climbed as high as 149.95 on electronic trading platform EBS, the highest since the single European currency's launch in 1999 and a hair's breadth away from the psychologically important 150 yen level.
Although dealers said a climb to that level was inevitable, many said the single currency could encounter selling pressure around that region, which was seen as fortified by a glut of options and sell orders.
Against the dollar, the euro rose to $1.2795 up around 0.35 percent.
The dollar was at 117.15 yen slipping 0.15 percent from Friday, when it hit a one-month high of 117.41 yen.
Sterling rose to around 221.40 yen pulling back a touch from 221.65, its highest level in eight years.
Traders said some dealers were hesitant to take fresh positions aggressively on Monday as London financial markets were closed due to a bank holiday.
The market's attention is likely to shift back to the dollar and euro as many important economic events are scheduled in the United States and Europe later this week, possibly shedding light on the path of monetary policy at the Federal Reserve and the ECB, analysts said.
Investors will scrutinise the minutes of the Fed's meeting from August 8 for insight into why it left its funds rate on hold after boosting it 17 straight times in two years to June. The Fed is expected to keep interest rates unchanged again in September and investors are eager to get any clues about the Fed's policy movements beyond September.
For such clues, they will focus on comments by Fed officials, including Chairman Ben Bernanke, who will make two public appearances this week. Dallas Fed President Richard Fisher and St. Louis Fed President William Poole will also speak this week. In addition, the market will look to a batch of US economic data, including August payrolls on Friday and indications of price growth in the personal consumption expenditures index for July, analysts said.
Meanwhile, market players will pay attention to statements and remarks by ECB President Jean-Claude Trichet following the central bank's policy meeting this week, when it is expected to leave rates on hold.