The dollar slipped on Monday on a weaker than expected ISM reading that raised concerns about a slowdown in U.S. growth, further eroding the gain to a three-week high made against the yen earlier in the session.
But traders said that Japanese institutional investors' buying of foreign assets at the start of the fiscal year is usually greatest in the second or third week of April, meaning the dollar will likely enjoy firm support throughout the month.
After rising to 118.80 yen on Monday, sell orders that had been placed above 118 yen are now nearly gone, clearing the way for the U.S. currency to climb higher, traders said.
"The dollar's rise could gain momentum once Japanese investors start buying in full force because their foreign asset allocations still favour dollars more than the euro or other currencies," said Sahara at Bank of Tokyo-Mitsubishi.
Kaoru Kondo, chief analyst at Fisco, said the dollar's fall from the three-week high against the yen suggested that the currency's near-term upside may be limited, though its rate advantage should provide support.
"In the end, the market will look at U.S. data for clues on the Fed's rate policy," Kondo said. "As long as expectations remain for more rate increases, the dollar should be firm."