The dollar hit a two-week low against the yen on Thursday in the wake of data showing U.S. housing starts sank to a 14-year low last month, cranking up speculation that the Federal Reserve may cut interest rates.
The yen trimmed gains made this week versus higher-yielding currencies as Asian stocks recovered on Thursday from losses the previous session, reheating demand for risky trades using the low-yielding yen to buy assets in higher-yielding currencies.
Traders said recuperating regional stocks were prodding the yen lower despite expectations that Group of Seven finance officials may discuss currencies in the context of the overall economy when they meet in Washington on Friday.
The yen has weakened because the carry trade remains well bid, said Sean McGoldrick, head of forex trading at Morgan Stanley in Tokyo.
My guess is that the G7 is not going to come out with anything too drastic (on currencies) and that we'll see a continued rally in the carry trade next week.
He added that many high yielders were benefiting from overall strength in Asian equity markets. Tokyo's Nikkei average was up 1 percent, clawing back above the psychologically key 17,000 level after dropping more than 2 percent on Wednesday.
Asian stocks slumped across the board on Wednesday when plans by India to curb foreign inflows sparked panic selling in the country's stock market, driving prices down as much as 9 percent.
The dollar was at 116.45 yen after easing 0.25 percent to near 116.35 yen on U.S. housing starts data on Wednesday that showed a 10.2 percent drop to an annual rate of 1.191 million units in September, the slowest since March 1993.
The euro rose 0.2 percent to $1.4235, edging closer to a record high around $1.4280 hit at the start of the month.
The U.S. currency took a broadside, with the Fed's Beige Book business survey showing U.S. growth has slowed since August.
Speculation that the Fed may lower rates this month from 4.75 percent increased after the figures, with U.S. short-term rate futures late on Wednesday showing roughly a 60 percent chance of a rate cut, up from around 40 percent on Tuesday.
The dollar also smarted due to a surge in oil prices to a record high and rising tensions between Turkey and Kurdish rebels in Iraq, which boosted geopolitical concerns.
But the market shrugged off comments by Thomas Hoenig, president of the Kansas City Federal Reserve Bank, who said late on Wednesday that he was keeping an open mind about the U.S. interest rate outlook while staying alert for fallout from financial market woes.
The single European currency rose around 0.2 percent to 165.85 yen, recovering earlier losses to drift towards a 2-1/2-month high around 167.75 yen hit earlier in the week.
The high-yielding Australian dollar was the day's biggest gainer, climbing as much as about 0.45 percent to $0.8944 on the back of the broad U.S. dollar weakness.
Such gains helped push the Aussie up more than 0.4 percent to 104.20 yen, after an initial slide to near 103.45 yen.
The New Zealand dollar initially dipped after New Zealand Finance Minister Michael Cullen told Reuters the currency was somewhat overvalued, but traders said New Zealand officials often voice displeasure about strength in the currency. The kiwi later recovered to trade more or less unchanged against the U.S. dollar and the yen.