The yen rose sharply on Monday after firm capital spending data raised speculation that the Bank of Japan may adopt a slightly more hawkish tone, prompting investors to unwind short positions.
The upbeat Japanese data came after a run of disappointing news on inflation and industrial production, which had dampened expectations for the Bank of Japan to raise rates from the current 0.25 percent this year and sent the yen to record troughs versus the euro. Net yen short positions jumped to record highs in the week to August 29, according to data from the Commodity Trading Commission.
Investors readjusted their holdings on Monday after data showed Japanese firms increased capital spending (capex) by 16.6 percent in the April-June quarter compared with a year earlier.
"The yen has probably been the star performer today among the majors. We've broken through some very key technical levels at 116 yen, which suggests that we have the top in place for dollar/yen and also in euro/yen," BNP Paribas senior foreign exchange strategist Ian Stannard said.
"Unwinding of positions is going to be the driving force behind this move in the yen." Some investors also said the data increased the chances that the Bank of Japan could follow up July's rate hike - the first in six years - with another such move before long.
By 1354 GMT, the yen was up around one percent on the day against the dollar at 115.93 yen, its strongest level since August 22. The yen climbed 0.7 percent against the euro to 149.12 yen, recovering from last week's record lows of 150.78 yen, according to Reuters data.
The Japanese currency rose 1.3 percent against the New Zealand dollar, which dropped more than one percent at one point against the US dollar. Market volatility was sharpened by the absence of US participants due to the Labour Day public holiday.
Also on Monday, China's Vice President said in a ruling Communist Party newspaper that Beijing would act to slow the growth of its foreign exchange reserves and spend more on imports of strategically important resources and high-tech goods.
The euro was 0.2 percent up against the dollar at $1.2866. The greenback briefly spiked higher on Friday after a keenly-watched US jobs report came in a bit better than expected.
The US economy generated 128,000 non-farm jobs in August, just above median expectations of 120,000. But the dollar's strength proved short-lived as investors concluded that the jobs report did little to change the outlook for US interest rates.