The dollar hovered near a 15-year low against the yen on Tuesday, weighed down by a slide in U.S. Treasury yields, putting the focus on whether Japanese authorities will take any measures to curb the yen's rise.
The dollar dipped as low as 85.11 yen in early Asian trade, within sight of a 15-year low of 84.72 yen struck last week on trading platform EBS.
Its fall came in the wake of the previous day's slide in U.S. Treasury yields, while selling by Japanese exporters at around the 0100 GMT Tokyo fixing also weighed on it, traders said.
The yen's gains were limited, however, with traders reluctant to push the currency higher as they waited to see if the government or the Bank of Japan will take new steps to rein in its export-sapping strength.
Helping to reinforce such caution, a government source said Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa are likely to meet next Monday.
The meeting may be brought forward to later this week, the source said, depending on market developments.
"There is a trend of dollar weakness stemming from moves in U.S. Treasuries, but the yen has reached danger levels so it's becoming a little hard to chase it higher," said a trader for a Japanese trust bank.
Outright yen-selling intervention seems unlikely, although the chances of that cannot be ruled out, for example if the yen's rise gains more steam or the benchmark Nikkei share average slides below 9,000, the trader said.
The more likely response from Japanese authorities would be some form of monetary easing by the BOJ, the trust bank trader said.
The dollar held steady against the yen from late U.S. trading on Monday at 85.32 yen.
The benchmark 10-year Treasury note yield dived more than 10 basis points to hit a 17-month low of 2.563 percent on Monday, according to Reuters data.
There has been a strong correlation between U.S.-Japanese government bond yield spreads, which have been narrowing, and the dollar/yen rate.
In the latest comments on the yen by a Japanese policymaker, Economics Minister Satoshi Arai was quoted by Kyodo news agency as saying the yen's rise may not cease with verbal intervention alone, adding that its rise may be in the final stage.
Former Japanese currency policy chief Hiroshi Watanabe said Japan may step into the currency market, possibly on its own, if the yen climbs about 3 yen against the dollar in a day.
But he said Tokyo does not need to take action now to stem the yen's strength, given that it is not rising rapidly.
The dollar index, a gauge of its performance against a basket of six major currencies, fell 0.4 percent to 82.248.
The dollar index has near-term support at an August 13 low of 82.182 and an August 12 trough of 82.109, while resistance is seen at a July 21 high of 83.451.
The euro edged up 0.3 percent to $1.2862, pulling away from a one-month low of $1.2732 hit the previous day on EBS.
But analysts and traders said the euro remains vulnerable to concerns about the health of Europe's banking sector and the sovereign debt situation in peripheral economies
The euro rose 0.3 percent against the yen to 109.75 yen after striking a seven-week low of 109.07 yen earlier on Tuesday.
"A stronger yen, despite some dismal domestic data, is a sign the market is calling for new policy steps by the BOJ," said Hideki Hayashi, a global economist at Mizuho Securities.
Japan's economy grew 0.1 percent in April-June, data showed on Monday, slowing sharply from the previous two quarters.
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