Strategists said comments from Bank of Japan board member Takehiro Sato, who said on Thursday he was opposed to deepening negative interest rates, had lifted the yen
The dollar hit a two-week low against the safe-haven yen on Thursday, weighed down by uncertainty over whether the U.S. Federal Reserve will raise interest rates in June or July.
Strategists said comments from Bank of Japan board member Takehiro Sato, who said on Thursday he was opposed to deepening negative interest rates, had lifted the yen, which was already trading strongly on the back of subdued risk sentiment across markets.
The greenback strengthened to a two-month high against a basket of currencies at the start of the week, after Fed Chair Janet Yellen kept alive the possibility of a rate hike at this month's meeting. But it has since lost about 1 percent, with sceptical investors pricing in only a 20 percent chance of a hike in June, according to CME's FedWatch.
The dollar was down half a percent by 0740 GMT at 108.99 yen , having earlier touched 108.825 yen, its lowest for two weeks. That was around 2.5 percent weaker than a one-month high of 111.455 yen set on Monday.
In London, BNY Mellon currency strategist Neil Mellor said Sato's comments might have lifted the yen a little, but its strength had more to do with doubts over whether Japan would be willing to intervene to weaken the currency.
"It's (Japanese Prime Minister Shinzo) Abe's worst nightmare," said Mellor. "Despite all the efforts behind Abenomics... It's still an export-oriented economy, much to Abe's chagrin. What he wants is a weaker yen to buoy exports."
Data on Wednesday showed that U.S. manufacturing grew for a third straight month in May, but factories appeared to be taking in fewer deliveries from their suppliers, which could hamper production in the months ahead.
"While the U.S. ISM numbers yesterday were pretty good, there's still uncertainty over whether there will be an interest rate hike in June," said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.
The European Central Bank will at 1145 GMT publish its latest interest rate decision, with no change expected, followed by a press conference with ECB chief Mario Draghi at 1230 GMT.
The euro rose 0.3 percent to $1.1221, its highest in nine days, lifted by market expectations that the ECB will raise growth and inflation forecasts, a rare positive step even as it emphasises persistent negative risks and a readiness to provide more stimulus.
"The immediate response in euro/dollar will depend on the impact of the ECB meeting on market risk sentiment," wrote Credit Agricole strategists in a research note. "A potential weakening of risk appetite could trigger some short position squaring and help the euro."
After hitting a five-month low on Wednesday and having got within a whisker of a 5-1/2-year trough, the Chinese yuan edged up a touch to 6.5786 yuan per dollar in the onshore market .