The yen hit a two-month low against the euro and eased versus the dollar on Tuesday on expectations Japanese investors will put more of their money into higher yielding assets overseas in the new business year that kicked off this week.
Traders said the market was eager to buy the single European currency on a growing view that interest rates will rise in the euro zone on the back of buoyant economic data.
"The ECB has been the laggard in raising interest rates compared with the U.S. Federal Reserve, so the euro is relatively easy to buy, especially against the yen," said Mitsuru Sahara, senior trader at Bank of Tokyo-Mitsubishi UFJ.
The European Central Bank is widely expected to leave rates unchanged at its policy meeting on Thursday, but traders said the latest economic data supported a view the ECB will signal in its post-meeting news conference that it will hike rates in May.
Data on Monday showed that euro-zone manufacturing grew at its fastest pace in more than five years in March, contrasting sharply with a surprising fall in the Institute for Supply Management's U.S. manufacturing activity index for the same month.
Traders said the yen's weakness was also more pronounced against the euro than versus the dollar due to the increasing attractiveness of carry trades with the euro.
In such trades, investors borrow the low yielding yen to invest in higher yielding currencies. The dollar earlier fell to the day's lows against the yen after a Hong Kong newspaper quoted a vice chief of China's parliament as saying Beijing can stop buying dollar-denominated bonds and reduce its holdings of U.S. debt.
But the U.S currency quickly recovered after a spokesman from China's central bank said that the comments reflected the parliamentarian's own view.