The yen shot to a one-month high against the dollar on Tuesday after softer-than-expected U.S. manufacturing data prompted investors to sell the greenback.
Further gains for the Japanese currency could be limited as investors wait to see what the Bank of Japan (BOJ) will deliver at its April 3-4 policy meeting.
The BOJ is widely expected to ramp up its bond buying and to extend the maturities of the bonds it purchases under new Governor Haruhiko Kuroda. The market has already priced in hefty easing from the central bank, making it hard for policymakers to surprise.
The dollar fell 0.3 percent to 93.04 yen, having fallen as far as 92.96, the greenback’s lowest level against the Japanese currency since early March.
The dollar has shed around 3.8 percent since peaking at a 3-1/2 year high of 96.71 yen on March 12.
“If you look at the spread between Japanese and U.S. bond yields, then the current level looks more reasonable than 95 yen to the dollar, which would only make sense if the yield on U.S. Treasuries was 2.5 percent,” said Masashi Murata, senior currency strategist at Brown Brothers Harriman.
The yield on 10-year U.S. government bonds stood at 1.837 percent on Tuesday.
The dollar has come under pressure after data on Monday showed factory activity grew at the slowest rate in three months in March, raising concerns that the U.S. economy is losing momentum due to government spending cuts.
The euro slipped 0.2 percent to about 119.68 yen. Earlier on Tuesday, the euro briefly slipped to 119.49 yen, matching a one-month low hit on Monday.
With the dollar under pressure, the euro drifted up 0.2 percent to $1.2867, pulling away from a four-month trough of $1.2750 plumbed last week as concerns intensified over the consequences of Cyprus’ bailout conditions.
However, upside for the common currency is limited due to political uncertainty in Italy and worries about the region’s debt problem and dour economic outlook.
“As the fundamental outlook for the euro region turns increasingly bleak, the ECB remains poised to strike a dovish tone for monetary policy,” said David Song, currency analyst at DailyFX.
“We may see a growing number of central bank officials show a greater willingness to push the benchmark interest rate to a fresh record-low as the recession threatens price stability.”
The European Central Bank holds its policy meeting on Thursday, ahead of U.S. non-farm payrolls on Friday.
The Australian dollar edged up 0.2 percent to $1.0450. Its immediate fortunes depend on the outcome of the Reserve Bank of Australia’s (RBA) policy meeting at 4.30 a.m. British time.
The RBA is expected to hold its cash rate steady at a record low 3.0 percent, and the market is keen to see if it will drop its easing bias or keep the door open to more cuts.
Any signs the RBA has ended its easing cycle could give Aussie dollar bulls a green light to buy the currency.
“We expect the RBA to drop its easing bias, despite the high exchange rate, given the recent run of better data,” analysts at Barclays Capital wrote in a client note.