The dollar climbed to a fresh five-month high against the yen on Tuesday on expectations that this week's U.S. jobs data would support the case for more aggressive rises in interest rates.
But despite gains against the yen, the U.S. currency eased versus the euro as traders took a breather from a rush of buying that pushed the dollar to a six-week high on Monday.
The dollar rose to 107.38 yen according to electronic trading system EBS, its highest level since late October, helped also by last minute buying by Japanese importers ahead of the fiscal year-end on Thursday.
"When the key interest rate of a major currency is expected to reach 4 or 4.25 percent by the end of December, it's easy to buy," said Mitsuru Sahara, senior vice president of the forex dealing group at UFJ Bank.
"This isn't the Russian rouble or the Polish zloty we're talking about. It's about the interest rate of the dollar."
Most market players expect the Federal Reserve to keep raising the benchmark federal funds rate, with some forecasting a rise to around 4 percent by the end of 2005, from the current 2.75 percent.
The dollar has rallied in the past week after the Fed suggested in its post-meeting statement that it might raise rates more aggressively if inflation heats up.
By 0538 GMT, the dollar was back down at 107.15 yen, little changed from the level in late U.S. trade.
The euro was at $1.2935, up from $1.2897 in late New York trade and off a six-week low of $1.2857 hit on Monday.
It fetched 138.55 yen versus 138.22 yen. The single European currency hit the day's high of around 138.75 yen as a 1.6 percent tumble in the Nikkei stock average sent dealers buying the euro against its Japanese counterpart.
Sterling and the Swiss franc, which fell to six-week lows against the dollar the previous day, tracked the euro's rise and also recovered some of their losses.
Dealers say the main focus of the market was the U.S. payrolls report due on Friday. Data is expected to show that 220,000 new jobs were created in March, down from 262,000 in February, which was the biggest gain in four months.