The Japanese yen tumbled to its lowest level versus the dollar since late November, pressured by worries about Japan's economic and political outlook.
The currency traded at 95.78 yen to the dollar, compared to 94.69 yen in North American activity late Monday. The dollar bottomed at around 87.11 yen in January.
The yen's recent decline underlines the fading of the currency's status as the ultimate safe-haven currency, strategists said. For much of last year and early 2009, the Japanese yen had strengthened during periods of increased financial turmoil and economic uncertainty, boosted by repatriation flows.
But strategists have noted a significant weakening of that relationship in recent weeks, with attention increasingly turning to a deepening Japanese recession and falling approval ratings for Prime Minister Taro Aso.
"Japanese economic fundamentals are truly dire and continuing to worsen. Until recently, that did not seem to matter because the Japanese yen was being supported by repatriation and deleveraging," said Callum Henderson, currency strategist at Standard Chartered, in a research note.
Recent data on foreign participation in Japanese money markets, however, indicates that deleveraging has largely run its course, he said. Also, weekly investment data indicate Japanese investors are looking to invest abroad, while trade figures show successive deficits.
Michael Woolfolk, a currency strategist at Bank of New York Mellon, said the yen's inability to rally versus the dollar as equity markets sank back to new lows Monday reflected the increased "weariness of investors" as Japan's woes mount.
Concerns rose following last week's resignation of Japanese Finance Minister Nakagawa, he said. Investors also downgraded the country's economic outlook after fourth-quarter gross domestic product registered a 12.7% annualized decline. See full story.
The dollar index , a measure of the greenback against a trade-weighted basket of rival currencies, rose slightly to 88.881, up from 87.226 late Monday.
The dollar lost ground versus the euro, which traded at $1.2806 versus the dollar versus $1.2718 late Monday.
But the single currency appeared to get a lift mainly from position-squaring following the dollar's push higher late Monday, strategists said.
The currency pair has remained largely range-bound and the outlook for the euro remains negative amid a continued lack of clarity over how the European Union plans to aid euro-zone countries that run into trouble meeting financing obligations, said Kenneth Broux, an economist at Lloyds TSB.
Markets posted little reaction to a decline in the Ifo Institute's business climate index to a record low in February. See full story.
The British pound was mixed. It changed hands at $1.4530 versus the dollar, up from $1.4493 Monday. The euro rose versus sterling, however, to trade at 88 pence, compared to 87.80 pence.
Attention Tuesday afternoon will turn to U.S. Federal Reserve Chairman Ben Bernanke's congressional testimony.
