The yen fell against the euro and dollar on Tuesday after a Japanese television report suggesting that the Bank of Japan may not raise interest rates at its policy meeting this week.
The euro firmed broadly, supported by a robust survey of German business sentiment and by the unwinding of positions after the greenback's rally the previous week. Japan's TBS television said that BoJ officials are in final co-ordination among themselves on holding off from raising interest rates this week. It gave no source for the story.
The report came as markets were bracing for a BoJ hike to 0.5 percent on Thursday. There had also been some speculation that the government could ask the bank to delay the move. "I would expect at this stage that if the BoJ wanted to direct expectations in one way or another it would be through a media source. It's just fuelling the uncertainty, maybe it's going to sway expectations back the other way but I think we need another comment for that to happen," said Derek Halpenny, currency economist BTM-UFJ.
By 1231 GMT the euro was up a quarter percent on the day at 156.20 yen. The dollar was steady on the day at 120.48 yen, around 30 ticks below last week's 13-month highs.
The euro was up a quarter of a percent at $1.2964, around a cent above last week's 1-1/2 month lows. Expectations for near-term US interest rate cuts have been scaled back sharply in the past couple of weeks in the wake of stronger than expected economic data. But the dollar's rally has run out of steam in the absence of any fresh news and with the United States shut for a public holiday on Monday.
"The move down in euro/dollar was probably a shake out of positions ... What we are seeing now is those positions gradually getting rebuilt and also the market has now taken out much of the Fed easing so there isn't an awful lot of upside for the dollar on US rate expectations," said Adam Cole, senior currency strategist at RBC Capital Markets. The New York Fed's manufacturing index for January is due at 1330 GMT, and is expected to ease to 20.00 from 23.13.
In the eurozone, forecasts are for another interest rate hike from the current 3.5 percent in March. The German ZEW index showed that investor sentiment in the bloc's biggest economy improved more than expected in January. The current conditions index came in at 70.6, above the expected 62.0, while the economic expectations indicator was -3.6, above the expected -10.
The dollar held steady versus the Canadian currency ahead of a Bank of Canada rate decision at 1400 GMT. The Bank is widely expected to hold rates at 4.25 percent and is unlikely to signal that rate cuts are imminent.
In Japan, expectations of a rate hike this week did little to boost the yen, as at 0.5 percent rates would still be the lowest in the industrialised world. A wide array of market players have borrowed the low-yielding yen and used the funds to purchase higher-yielding currencies in carry trades, helping push sterling to an eight-year high against the Japanese currency.