The yen rose to a 1-1/2-year high against the dollar on Monday, benefiting from a spike in volatility caused by nervousness about credit-related losses at U.S. banks.
However, the dollar was higher against other major currencies. In the last few days, a sharp increase in caution among investors has halted a yield-seeking trend, which had propelled the Australian dollar to 23-year highs against the U.S. dollar.
Dealers also said that with the U.S. Treasury debt market closed for the Veterans Day holiday, volume was lower and exaggerated price action.
The U.S. dollar is broadly higher as positions are unwound and market participants reduce overall risk exposure in thin holiday markets, said currency strategists with Brown Brothers Harriman in a note.
Markets do remain concerned about ongoing write downs by financial institutions.
The dollar fell to an 18-month low of 109.16 yen, according to Reuters data, before recovering slightly to trade at 109.43, down about 1.2 percent on the day.
Last week, the dollar suffered its biggest weekly decline against the yen since December 2005.
The euro was down 1.9 percent at 159.35 yen, falling below 160 yen for the first time in two months.
Against the dollar, the euro slipped 0.7 percent to $1.4573, retreating from a record high of $1.4752 hit on Friday.
The dollar index, which tracks the greenback against a basket of six major currencies, was 0.5 percent higher at 75.786, on track for the largest daily increase in three weeks.
Our metaphor has been that the dollar's 'boat' has been populated to the bearish side so heavily that it was 'listing' more than merely awkwardly, and that it was due to capsize, said Dennis Gartman, independent investor, in a daily note to clients.
FEAR AND DISLOCATION
Fears about U.S. financial institutions' losses from the subprime mortgage crisis, and ensuing credit market turmoil, have risen sharply in the last few days as banks, including Citigroup, Merrill Lynch & Co and Wachovia Corp (WB.N: Quote, Profile, Research) announced more than $40 billion of write-offs this year on mortgage-related debt.
Bank of America Corp said late last week that significant dislocations in the debt capital markets would hurt fourth-quarter results, and JPMorgan Chase & Co Inc said shaky credit markets could trigger more write-downs.
The dominant theme for the FX market is risk reduction, said Adarsh Sinha, currency strategist at Barclays Capital.
That was translating into a reversal of carry trades, where investors borrow low-yielding currencies to fund purchases of higher-yielding assets.
The Australian dollar was one of the biggest movers on the day, plunging 3.3 percent to US$0.8820. If it kept its losses on the day, the Australian currency would chalk up its biggest daily decline since at least January 2000.
The New Zealand dollar, even with the highest interest rate among the world's developed economies, was down 2.3 percent to US$0.7453.
(Additional reporting by Meg Clothier in London, Editing by Chizu Nomiyama,)