The yen rose on Monday after a newspaper report said Japan had ended its policy of intervening to curb its gains, while the euro briefly fell on nervousness that the European Central Bank may cut interest rates this week.
Japanese officials denied the Times of London report, which was based on a Bank of Japan (BoJ) source, that they would no longer seek to weaken the yen and said their currency policy was unchanged.
The report initially sent the yen to six-week highs against the dollar before the Ministry of Finance (MoF) reminded markets that it, and not the BoJ, controlled foreign exchange policy and that it would continue intervening as needed.
"It's the fear of MOF intervention that is stopping dollar/yen from collapsing," said Steven Saywell, currency strategist at Citibank in London.
"If that were to be removed completely then you'd see dollar yen go much lower, but it continues to be a significant factor in market trading."
Meanwhile, the euro briefly hit its lowest level this year against the dollar and a four-month low against the yen as markets worried the ECB would cut interest rates on Thursday to support the bloc's fragile economic recovery.
"ECB risks this week are certainly weighing on it. If the ECB does not ease this week then you could see a rebound in euro/dollar," said Saywell.
By 1145 GMT, the yen traded 0.4 percent higher on the day against the euro at 128.04 after firming one percent on the day to 127.26.
It traded a quarter percent higher from last Friday's levels on the dollar at 105.64, after hitting a six-week high earlier. A break beyond 105.16 would be the yen's strongest in 3-1/2 years.
The euro traded steady on the day against the dollar at $1.2105, after retracing earlier losses to $1.2050 - its lowest level so far this year.
Interest rate futures had priced in a roughly 50 percent chance of an ECB rate cut by June before profit-taking in bond markets took them lower on Monday.
Some in the market think the bank will not wait until June after President Jean-Claude Trichet said last week the central bank would reassess its outlook if consumer demand does not improve.
Other ECB officials reprised this dovish tune later in the week, with Executive Board member Gertrude Tumpel-Gugerell saying on Friday Europe's recovery was uncertain and data mixed, with no sign that consumer demand was firming.