The US currency has fallen for four straight sessions against the safe-haven yen, prized for its liquidity in times of market stress.
South Korean and US forces began computer-simulated military exercises on Monday amid tension over North Korea's weapons programs, angering the Asian communist regime. North Korea views such exercises as preparations for invasion and has fired missiles and taken other actions over military drills in the past.
"The typical hyperbolic verbiage may have contributed to a selloff in dollar/yen," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.
"After testing support at 108.50 three times over the past month, dollar/yen appears to have found a base at this level and the key question this week will be whether the dollar can stage any sort of counter trend rally ahead of the Jackson Hole symposium this week," he added.
Though bets of a policy change have been reduced in recent days amid the general political turmoil in the United States, expectations of a Fed rate hike may rise if Chair Janet Yellen emphasizes in her speech on Friday that the risks to inflation objectives and financial stability require careful monitoring.
In late morning trading, the dollar fell 0.4 percent against the yen to 108.73 yen.
The euro, on the other hand, rebounded from the day's low to trade up 0.3 percent at $1.1796. It held well below a 2-1/2-year high above $1.19 hit earlier this month as markets bet the euro's double-digit gains this year may be too much for a central bank that is still wary of removing stimulus.
Despite recent losses, it is still up more than 11 percent so far this year, making it the best performing currency in the G10 currency space.
Last week, it was reported that European Central Bank President Mario Draghi will not deliver a new policy message at a Fed conference in Jackson Hole this week, which tempered expectations for the ECB to start charting the course out of stimulus.
But traders are not taking any chances. About $45 billion of euro-dollar currency options will expire in the three days leading up to the Wyoming meeting.