The dollar hovered near a four-week high against the yen on Wednesday after the Federal Reserve suggested more credit tightening may be needed after delivering its 14th straight interest rate increase. As Alan Greenspan passed the Fed chairmanship to Ben Bernanke after 18 years at the helm, central bank policy makers tweaked the post-meeting statement to give Bernanke some leeway but still indicated more rate moves were possible.
"The statement fueled market expectations that the Fed will further increase interest rates," said Hiroki Shimazu, a market economist at Mizuho Securities.
The Fed dropped the word "measured", which had signalled more tightening was likely ahead and had appeared in every statement since the central bank started clamping down on credit in June 2004. Many in the market see the Fed lifting rates to 4.75 percent in March after bumping its funds rate to 4.5 percent on Tuesday, though further action will depend on the shape of coming economic data.
This week's two major U.S. releases -- the Institute for Supply Management's monthly snapshot on manufacturing at 1500 GMT and the January jobs report on Friday -- are expected to show upbeat activity and hefty hiring.
The ISM factory index is seen coming in at 55.4 in January compared with 55.6 in December, which would mark a 32nd straight month of expansion.
"The currency market will be more volatile than before. The sensitivity to the upcoming data will be higher than before," said Masafumi Yamamoto, currency strategist at Nikko Citigroup in Tokyo.
By 0540 GMT, the dollar was down slightly at 117.15 yen from late New York levels at 117.20 yen but still in sight of a four-week high of 117.81 yen struck on Monday.
The euro was little changed at $1.2155, settling into a range after backing away from a four-month high of $1.2325 hit on electronic trading platform EBS last week. The single currency was also little changed at 142.45 yen after hitting a seven-week high of 142.68 yen on Tuesday and closing in on the all-time peak of 143.62 yen.
Financial markets showed little reaction to U.S. President George W. Bush's State of the Union speech in which he said the world must not allow Iran to develop nuclear weapons and set the goal of slashing Middle East oil imports 75 percent by 2025.
"It's an admirable goal, but it's not going to change the U.S. trade deficit within the forecast horizon of the FX market," said Marshall Gittler, chief Asian strategist at Deutsche Bank Private Wealth Management in Singapore.