The dollar fell against the yen on Monday as profit-taking emerged in the wake of its rise to a 2-1/2 year high last week -a rally that was driven by expectations of more forceful monetary easing by the Bank of Japan.
The dollar shed 0.5 percent to 87.75 yen, pulling away from Friday's session high of 88.48 yen on trading platform EBS, the greenback's highest level against the Japanese currency since July 2010.
Although the dollar may be due for a pullback against the yen given the speed of its rise over the past month, its uptrend seems likely to remain intact, said Hiroshi Maeba, head of FX trading Japan for UBS in Tokyo.
"My sense is that the market could still head much higher," Maeba said. "I think 90 yen might be reached pretty soon," he said, adding that the dollar could head toward 95 yen over the next six months and possibly as early as March.
Despite hopes for the new Japanese government's expansionist economic policies, the yen is likely to stay under pressure from Japan's trade deficits and yen-selling related to Japanese firms' acquisitions of overseas businesses, Maeba said.
"The market's supply and demand balance (for dollar/yen) has changed significantly," he said, adding that such a shift had taken place over the course of the past year or so.
The dollar gave back some gains after having climbed 2.7 percent versus the Japanese currency last week, the greenback's biggest weekly rise against the yen in more than a year.
Its gains accelerated last week after minutes from the Fed's December meeting showed some policymakers had mulled ending their bond-buying program as early as this year.
By contrast, many investors are now betting that Japan's new government, led by Prime Minister Shinzo Abe, will move to weaken the yen and push through aggressive fiscal stimulus, and pressure the Bank of Japan to do the same on the monetary side.
Traders said the yen found some support on Monday on worries that Japanese mobile operator Softbank Corp's (9984.T) deal to buy 70 percent of U.S. carrier Sprint Nextel Corp (S.N) could run into some complications.
The general counsel for investment fund Crest Financial said on a call with reporters on Friday that it will ask the U.S. Federal Communications Commission to block Sprint's plan to sell 70 percent of itself to Softbank Corp for $20 billion.
"Some people say that this is triggering yen-buying in dollar/yen and on the yen crosses," said a trader for a Japanese bank in Bangkok.
For now, however, profit-taking seems to be the main factor weighing on the dollar against the yen, the trader said.
Softbank Corp's $20 billion deal to buy about 70 percent of Sprint, announced in October, had refocused attention on Japanese firms' interest in overseas acquisitions and been viewed as a supportive factor for the dollar against the yen.
The euro dropped 0.7 percent against the yen to 114.37 yen, moving away from its 18-month high of 115.995 yen set on trading platform EBS on Wednesday last week.
Against the dollar, the euro eased 0.2 percent to $1.3036, after falling to a three-week low of $1.2998 on EBS on Friday.