The yen fell for a second straight session on Monday, giving back more of the sharp gains scored last week after China ditched the yuan's decade-long peg to the dollar and let it move in line with a basket of currencies.
With few people in the market expecting China to take further steps to liberalise its currency regime anytime soon, buying of the yen, which had been bought as a proxy bet on a rise in the yuan and Asian currencies, lost steam.
Traders said the market had turned its attention back to economic data and the widening interest rate advantage the US currency has over the euro and the yen.
"For now, the focus is on the US second-quarter gross domestic product data on Friday, which could help support market expectations for a continued rise in US interest rates," said Hideki Hayashi, global strategist at Shinko Securities.
The dollar bought around 111.60 yen, up around 0.2 percent from its level in late New York trade on Friday. The US currency had plunged to as low as 109.87 yen on Thursday in the aftermath of Beijing's sudden move.
The euro fetched around $1.2050, down from $1.2065 in late New York trade. The single European currency was at 134.45 yen. It dived as low as around 133.60 yen on Thursday.
The dollar was also supported by investors making up for having failed to buy the currency on Friday and by month-end demand from Japanese importers.
The yuan traded at 8.1101 per dollar a 2.1 percent revaluation from its old peg.
After keeping the yuan virtually fixed at 8.28 per dollar since 1996, China said last week it was adjusting the currency's value to 8.11 and linking it to a basket of currencies of the country's main trading partners rather than just the dollar.
The head of China's central bank, Zhou Xiaochuan, said on Saturday that the revaluation was an initial step, and added the bank would adopt a gradual approach to reforming the country's exchange rate regime.
Yu Yongding, a member of the central bank's monetary policy committee, said in remarks published in the China Securities Journal on Monday that pressure for the yuan to appreciate would increase further in the short term.
Despite Yu's comments market players said any imminent action was unlikely and investors wouldn't stray far from the US interest rate theme that has helped to buoy the dollar this year.
Since June 2004, the Federal Reserve has raised its funds rates to 3.25 percent from 1.00 percent.
Besides the upcoming GDP data, the market was also awaiting US new home sales figures for June, due on Wednesday.
Strong housing sales could give the Fed reason to raise rates at a higher pace to help dampen what many analysts regard as a bubble in housing prices.
Some longer term investors said the shift to managing the yuan in line with a currency basket suggested that China would eventually put less of its foreign reserves in dollars and more in other major currencies like the yen and euro.
"The dollar's rebound in 2005 looks to be over," said Akira Takei, a senior foreign bond fund manager at Fuji Investment Management, which oversees 1.3 trillion yen ($11.65 billion) of assets.
Takei said he was especially looking to European currencies like the euro, sterling and Swedish krona to rebound against the US currency in coming months.
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