The yen slipped on Tuesday and high yielding currencies rallied as gains in equity markets bolstered risk appetite and saw investors move tentatively back into carry trades.
The dollar gave up some of the previous days gains, dipping back towards a record low against a trade-weighted basket of currencies after its strongest day in over a year on Monday.
The yen fell broadly and higher yielding currencies rose as rising stocks pointed to increased confidence leading to a move back into the carry trade where investors sell the low yielding yen to fund investments in higher yielding assets.
U.S. equities recovered yesterday which has led to a slight return to risk appetite and carry plays, said Geoff Kendrick, currency strategist at Westpac. But the market is flip-flopping and the story could turn around as easily today as it did yesterday.
By 0738 GMT the dollar inched up 0.1 percent to 114.31 yen, pulling further away from a six-week low of 113.23 yen hit on Monday.
The euro was up 0.15 percent to $1.4206 and rose 0.15 percent to 162.44 yen.
The high yielding Australian and New Zealand dollars were both up around 0.5 percent against the greenback.
The dollar index, which measures its value against a trade-weighted basket of major currencies, was down slightly at 77.873, having rebounded from a record low of 77.093 hit on Monday.
Investors sold the U.S. currency in Asia on Monday, disappointed that a statement by Group of Seven finance ministers and central bankers at the weekend made no specific mention of the dollar's recent weakness.
But the greenback posted its largest daily gain against the euro since June 2006 as investors concluded that the dollar's fall may be overdone.
However analysts said that the dollar was likely to remain under pressure.
Monday's price action looks like nothing more than a correction to over-extended positioning, rather than any fundamental change in investment strategy, ING said in a client note.
Relatively high oil prices and the prospect for lower U.S. rates should continue to see the dollar deficit recycled into euro and sterling and thus we expect the USD Index to stay under pressure.
Investors will look to euro zone industrial new orders data at 0900 GMT for clues on the health of the euro zone economy and prospects for interest rates.