The yen stayed on the defensive on Monday with the euro reaching a fresh five-month high against the Japanese currency, while the dollar nursed losses following a setback late last week.
The euro rose as high as 110.15 yen at one point on trading platform EBS, its highest level since late October.
It later pared its gains and was last changing hands at 109.81 yen, down 0.1% from late U.S. trade on Friday.
In another sign of the yen's recent weakness, the Australian dollar rose to 88.62 yen, its highest level since May 2011. The Australian dollar last stood at 88.37 yen, up 0.1% from late U.S. trade on Friday.
The yen's status as the currency of choice in funding carry trades was cemented last month after a surprise easing by the Bank of Japan. Additionally, the recent surge in U.S. Treasury yields has made the greenback less appealing as a funding currency versus the yen.
Given how much the yen has fallen since the BOJ's surprise monetary easing in February, the Japanese currency may be due for some respite, said a trader for a major Japanese bank in Singapore.
"I don't think we will see any sudden move toward yen strength for a while, but we could see the market swing back a bit," the trader said, adding that March was typically a month that attracts some Japanese corporate demand for yen ahead of Japan's business year-end at the end of the month.
Data on market positioning underscores the extent to which market sentiment has turned against the Japanese currency recently, with currency speculators now heavily short the yen.
Currency speculators have increased their net short position in the yen to 42,380 contracts in the week ended March 13, the highest in 11 months, data from the U.S. Commodity Futures Trading Commission released on Friday showed.
The dollar was little changed against a basket of currencies at 79.791, after having dipped around 0.5% on Friday as the dollar succumbed to profit-taking.
Against the Japanese currency, the dollar last stood at 83.42 yen, steady from late U.S. trade on Friday, having retreated from an 11-month high of 84.187 yen hit on Thursday.
Whether the dollar rises further against the yen in coming months will depend on the Bank of Japan's monetary policy, said Ray Farris, chief strategist for Asia fixed income for Credit Suisse in Singapore.
"If the BOJ continues to, month after month, push with new monetary easing measures and does enough to convince the domestic market in Japan that it is serious and credible in trying to raise the inflation rate to about 1%, then dollar/yen can probably continue to rise," Farris said.
"But it's still unclear just how aggressive the BOJ is willing to be," he said.
The dollar could end up higher than Credit Suisse's forecasts of 80 yen in three months and 83 yen in 12 months, given how U.S. yields have started to rise, Farris said.
"But unless the BOJ continues to surprise the market with new measures, we tend to think that dollar/yen has probably overshot a little bit," he added.
The euro dipped 0.1% to $1.3167, but remained well above last week's trough near $1.3004.
