The yen dipped against the euro on Friday in thin trade after data showing a sharp slowdown in Japanese inflation underscored fears the world's second-largest economy could sink back into deflation next year.
The dollar initially got a boost against the yen as Japanese companies needing dollars to settle deals bought the U.S. currency ahead of the year-end.
Friday was the last business day for many Japanese firms this year and their offices will remain shut until January 5.
But the U.S. currency quickly gave up gains against the yen and slid versus the euro as concerns about a prolonged and deep U.S. recession prompted traders to dump the dollar.
"Some players have sold the dollar, believing the U.S. currency will resume its slide as soon as U.S. and European investors return from holidays next week," said a forex trader at a big Japanese bank.
Activity was subdued as financial markets in Australia, New Zealand, and Europe are closed until next week.
The dollar traded at 90.37 yen, little changed from late Asian trade the previous day.
The U.S. currency climbed as high as 90.84 yen on trading platform EBS just before the Tokyo fixing at 8 p.m. EST on Thursday.
The dollar was also on track for its first weekly rise against the yen since the week to November 9, when it rose 0.5 percent. The U.S. currency's expected weekly gain reflects better investor risk appetite thanks to the global central banks' aggressive steps to combat the financial crisis.
The euro climbed to $1.4065 from around $1.4015 in late Asian trade on Thursday, supported by expectations that the European Central Bank will slash interest rates further from the current 2.5 percent but in slower pace.
Against the yen, the European single currency strengthened to 127.12 yen from around 126.65 yen.
Japan's annual core consumer inflation slowed to 1.0 percent in November from 1.9 percent in October, government data showed on Friday.
In a sign of more trouble for an economy already in recession, industrial output plunged a record 8.1 percent in November, while the ratio of jobs available to job seekers fell to a nearly five-year low.
Still, the dollar failed to hold on to its earlier gains against the yen as investors are more concerned about the health of the world's biggest economy.
U.S. data on Wednesday showed consumers cut their spending in November for the fifth straight month and orders for costly manufactured goods slumped, while the number of workers filing new claims for jobless benefits last week hit a 26-year peak.
