The yen gained around 1 percent versus major currencies on Tuesday as falling global stocks, concern about Iran's nuclear programme and jitters ahead of key US data prompted some investors to unwind carry trades.
The dollar hit a two-month low against the euro, extending its grind lower ahead of figures from the US housing and consumer sectors which could fan concern about a slowdown in the world's biggest economy and a possible interest rate cut.
Geopolitical concerns, jitters about rising defaults among high-risk borrowers in US sub-prime mortgages as well as falling stock markets made investors wary of taking on risk and prompted them to buy back low-yielding currencies such as the yen and Swiss franc.
"There are a number of factors which in combination are making people a little uneasy. In terms of FX the yen has borne the brunt of that. Being short yen, to the extent which the market currently is, requires generally a very low risk background," said Ian Gunner, head of FX research at Mellon.
"With equity markets showing some strain ... the Iranian situation and the recovery in the oil price has just tweaked those concerns a little further this week." Iran said on Tuesday it would never suspend uranium enrichment as demanded by the West a day after major powers agreed to work on a new UN Security Council resolution to pressure on Tehran over its nuclear programme.
By 1227 GMT, the dollar was down 1 percent at 119.35 yen, a one-week low. The euro was down 0.8 percent at 157.73 yen. The Swiss franc hit a two-month high of 1.2229 per dollar and was up 0.2 percent at 1.6180 per euro. The euro hit a two-month high of $1.3230, up a third of a percent on the day.
Traders awaited January figures on US durable goods at 1330 GMT and February consumer confidence at 1500 GMT. "We expect January durable goods data to provide little in the way of reassurance ... with our economics team looking for another sharp decline the headline," UBS said in a note.
The focus was also on existing home sales for January, given growing concerns about riskier mortgage deals, some of which have gone awry in the housing market downturn. Investors are wary that a possible Federal Reserve rate cut later this year could take shine off the dollar's yield premium at a time when the ECB is tightening monetary policy.
Markets shrugged off news that eurozone money supply rose more than expected in January, or to sources telling Reuters that the European Central Bank is undecided on whether to signal more rate rises after a widely anticipated hike next week. The yen has wiped out all the losses made against the dollar after the Bank of Japan signalled last Wednesday it would be slow in raising interest rates.
It also garnered support from comments by IMF Managing Director Rodrigo Rato that a weak yen and strong carry trades are affecting policies in countries from Asia to Europe. He added that circumstances should change over time as Japan moved to more normal monetary policy.