The dollar lost ground in early trading as a rebound in Japanese equities boosted the yen and on growing concerns over US inflation.
The dollar dropped below the Yen 113 level following a sharp rise in the Nikkei 225 index, and the yen also continued to benefit from yesterday's strong Japan first quarter GDP numbers, dealers said.
At 10.40 a.m. the dollar was trading at € 1.2002.
"The yen has been the big mover. Obviously a near 2-1.2 per cent bounceback in Japanese stocks and optimism about the Japanese economy in the wake of the GDP numbers is continuing to give the yen support," said Mr Steve Barrow, currency strategist at Bear Stearns.
The slip back in oil prices from Monday's highs also gave the yen some assistance, dealers said.
The dollar also continued to be weighed down by concerns over inflation in the US following comments yesterday by Richmond Federal Reserve president Mr Alfred Broaddus, who indicated that the recent pick-up in price pressures may have taken the Fed by surprise.
"The rapidity of the apparent bottoming out of core inflation and its subsequent upswing has naturally gotten the attention of all of us who are determined to contain inflation and preserve the price stability it took almost 20 years to achieve," said Mr Broaddus.
Barrow said US core inflation has accelerated to an annualised rate of 3.3 per cent in the past three months compared with just 0.8 per cent in the previous three-month period, and inflation worries may therefore offset any positive impact on the dollar from expectations of Fed interest rate hikes.