The yen rose broadly on Tuesday ahead of a policy decision from the Bank of Japan (BOJ) later in the day which some traders hope will prove crucial in determining if and when the central bank will move away from negative interest rates.
Expectations are for the BOJ to maintain its ultra-loose monetary policy at the conclusion of its two-day meeting.
Still, investors will be parsing the outcome for hints as to how soon the BOJ could end a policy that is an outlier among major economies, particularly as comments from Governor Kazuo Ueda this month stoked speculation of an imminent policy shift.
Against the U.S. dollar, the yen JPY=EBS rose more than 0.3% to 142.31, and stood not too far from a four-month high of 140.95 hit last week.
The Japanese currency has risen more than 6% since it touched a year low of 151.92 in November, in part due to a broadly weaker dollar and expectations that Japan's ultra-low rates environment could be nearing an end.
The euro fell 0.26% to 155.67 yen EURJPY=EBS , while overnight volatility in the yen JPYONO= was last at 29.655%, after having jumped to its highest since July on Monday.
"While steady BOJ policy may be on the cards for this week, the meeting may still be instrumental," said Jane Foley, senior FX strategist at Rabobank.
"In recent months, the commentary from some BOJ officials suggests a cautious, but tangible, increase in confidence that the conditions that would sustain a virtuous cycle of wage inflation, increased consumer demand and profitability are building.
"That said, it is also very clear from the remarks of BOJ officials that the central bank is in no rush to remove stimulus."
Elsewhere, the greenback languished near roughly five-month lows against the Australian and New Zealand dollars, as the risk-sensitive currencies got a leg up on the prospect that the U.S. Federal Reserve could begin easing interest rates as soon as early next year.
The Aussie AUD=D3 edged 0.02% higher to $0.6708, having peaked at $0.6736 in the previous session, its highest since July 31.
The kiwi NZD=D3 likewise rose 0.1% to $0.6218, standing not too far from Monday's top of $0.6250.
While some Fed officials have pushed back against market expectations of how soon the Federal Open Market Committee (FOMC) could cut rates, those comments have done little to sway market pricing and stem the greenback's decline.
Chicago Fed President Austan Goolsbee on Monday said the Fed is not pre-committing to cutting rates soon and swiftly, and the jump in market expectations that it will do so is at odds with how the U.S. central bank functions.
"It may take (the) PCE inflation or comments from FOMC Chair (Jerome) Powell to encourage market participants to delay their expectations for the start of the rate cut cycle," said Joseph Capurso, head of international and sustainable economics at Commonwealth Bank of Australia (CBA).
A reading on the core Personal Consumption Expenditures (PCE) price index - the Fed's preferred measure of underlying inflation - is due this week, providing further clarity on whether inflation has slowed sufficiently for the Fed to begin easing its monetary policy next year.
Sterling GBP=D3 rose 0.07% to $1.2656, while the euro EUR=EBS slipped 0.01% to $1.0921.
CBA's Capurso said those two currencies are the most vulnerable to a dislocation in oil and gas markets given their increasing dependence on energy from the Middle East, after the Yemeni Houthi militant group attacked ships in the Red Sea.
Those attacks led to a spike in oil prices as investors worried about disruption to trade as well as supply costs.
"Middle East oil and gas supplies may be put at risk," said Capurso. "That's why the euro and sterling are most at risk for big falls if these conflicts get worse or spread."
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