The dollar held chunky gains chalked up overnight in Asia on Wednesday after the Bank of Japan expanded its asset-buying program the day before and with the euro hurt by more bad news from the euro zone.
Japan's central bank boosted its asset-buying scheme to 65 trillion yen ($829 billion) in a bid to pull an ailing economy out of deflation, but experts remained sceptical of any lasting impact on the yen without a substantial change in interest rate differentials.
It is difficult to ramp up inflation expectations in a country that has been facing deflation for years. Therefore, the impact on JPY should be limited as usual since there is little impact on real interest rates, said Tohru Sasaki, head of Japan rates and FX research at JPMorgan Chase Bank in Tokyo.
We continue to believe that USD/JPY will follow the usual fiscal year-end pattern to head lower as Japanese corporates repatriate foreign retained earnings while institutional investors increase hedging activity, he said in a note.
The dollar traded at 78.45 yen, having surged more than 1 percent to its strongest since November 1 at 78.55 the day before.
Tuesday marked its biggest one-day percentage gain since October 31, when Tokyo stepped into the market to weaken the yen.
The greenback held well above strong support at its 200-day moving average, currently 78.04 yen, having closed above it for the first time since mid-April.
The euro was also gently bid against the yen in Asian morning trade, fetching 103.00 yen, a little below an overnight high of 103.20. The pair has met heavy resistance in the 103.20-30 area over the past few sessions, with selling by Japanese exporters cited as behind the pressure on the yen.
But the single currency nursed most of the heavy losses sustained against the dollar after euro zone finance ministers dropped plans for a face-to-face meeting on Greece's new bailout, saying politicians in Athens had failed to provide the required commitment to reform. The ministers will instead hold a teleconference.
Euro has lost steam and looks vulnerable to a further correction lower, said Mitual Kotecha, head of global fx strategy at Credit Agricole CIB.
The fact that EU finance ministers have cancelled a meeting due to be held today means that markets will have to prolong their wait for an agreement on a second bailout package for Greece, he said.
The euro was also hurt as Moody's downgraded six European countries on Tuesday and warned it may cut the ratings of three others. It was at $1.3127, having gone as low as $1.3080 overnight.
Following the downgrade of ratings of several euro zone countries yesterday and a likely drop in Q4 2011 Eurozone GDP today, caution will be the prevalent theme today, leaving EUR/USD on the back foot and opening the door for a test of technical support around 1.3026, Kotecha said.
The Australian dollar stayed tethered to recent ranges at $1.0697, barely changed from late New York levels.
The New Zealand dollar gained 0.2 percent to $0.8341 after New Zealand retail sales rose 8.0 pct in Q4, beating expectations for 5.5 pct rise.
The data also helped lift the kiwi to a four-month high against the Aussie, with Aussie/kiwi briefly slipping as low as NZ$1.2787.