The yen hit a record low versus the euro on Tuesday and was stuck near a 4-1/2-year trough against the dollar as investors kept favouring carry trades funded with the low-yielding Japanese currency.
The yen has fallen across the board since Bank of Japan Governor Toshihiko Fukui said late last week he had no preconceived ideas about a future rate rise, dousing expectations of a rate increase in July.
Most market players are looking for the BoJ to raise rates to a 12-year high of 0.75 percent in August, but such a move is not expected to dull the allure of carry trades - borrowing cheap funds in the yen to buy higher-yielding currencies.
"The carry trade is the main driver of the market," said a senior trader at a Japanese bank. The yen has also suffered as Japanese household investors pour funds into mutual funds featuring foreign assets in search of better returns.
The euro has strengthened as market players see the European Central Bank lifting rates twice more this year to 4.5 percent, while the Federal Reserve is now widely seen keeping rates on hold at 5.25 percent rather than cutting them.
The dollar has slipped against the euro in the past few sessions, giving up some gains as benchmark US Treasury yields have fallen back after last week's spike to five-year highs on a brightening US economic outlook.
The euro rose to a lifetime high of 166.10 yen on electronic trading platform EBS before trimming gains to 165.87 yen little changed from late New York trade on Monday. The single currency was barely budged near $1.3420 having rebounded from an 11-week low of $1.3264 hit last week.
The dollar was steady at 123.60 yen staying near 123.76 yen, its 4-1/2-year high hit the previous session on EBS. The US currency's gains versus the yen were capped by selling from Japanese exporters as well as options players protecting positions, traders said.
The high-yielding Australian and New Zealand dollars, among the most popular for carry trades, hovesee if a downturn in the housing market, a soft spot for the economy, has finally bottomed out.
"The housing figures today are important for the dollar to solidify its strength after it recovered on faded expectations for a Federal Reserve rate cut," said Katsuya Fujita, head of forex option trading at Sumitomo Mitsui bank. Economists forecast that housing starts would slow to an annualised 1.480 million in May from 1.528 million in April.
Some traders were concerned that investors might start thinking twice about holding risky positions after a report that Merrill Lynch & Co took control of $400 million of loan assets underlying a troubled hedge fund at Bear Stearns Cos. Inc, which dented US stocks on Monday.
The report, following data showing sentiment at US home builders fell to a 16-year low this month, highlighted how the troubles in the housing market and subprime mortgages are still a drag on the economy.