The yen surged on Monday, rallying nearly 1 percent against the dollar as buying by Japanese investors before the end of the fiscal year this week triggered a wave of short-covering.
The dollar also lost ground against the euro as traders waited to see whether the Federal Reserve would flag more credit tightening ahead after an expected interest rate rise at this week's meeting. The yen jumped more than 1 percent against the battered Australian and New Zealand dollars, striking an 18-month high against the kiwi, with one big Japanese financial institution cited in particular as bringing cash back home, traders said.
"This is the last wave of huge repatriation," said Noriyuki Kato, treasury manager at State Street Global Markets in Tokyo. "The market was surprised, but I'm not sure if you can justify a follow-through from here." Hefty buying of foreign bonds by yield-starved Japanese investors was one of the main drivers behind the yen's 13 percent slide against the dollar last year.
Speculation that China will allow the yuan to strengthen more against the dollar after a visit by two prominent U.S. senators last week also spurred gains in the yen, which is often traded as a proxy for the Chinese currency, traders said.
The two senators, Charles Schumer and Lindsey Graham, are sponsors of a bill that threatens to slap China with a 27.5 percent tariff on its exports if Beijing does not allow the yuan to appreciate more substantially. The dollar was down 0.75 percent to 116.55 yen by 0320 GMT, sliding sharply from an intraday high of 118.50 on Friday. Overall the dollar has been trapped in a broad range between 115.50 and 119.50 over the past two months.
The euro retreated 0.6 percent to 140.55 yen but the single currency clawed up slightly against the dollar to around $1.2055 from $1.2035 late in New York on Friday.