The yen surged on Tuesday after Japan's prime minister said radiation levels near a quake-stricken nuclear plant had become high and the risk of further nuclear leakage was rising, prompting investors to dump risky assets.
Trading was choppy, and the yen later trimmed some of its gains after a 100-pip spike in the dollar to above 82.00 yen spurred vague talk of yen-selling intervention by Japanese authorities.
But the dollar later sagged and traders said they were unsure if intervention occurred, adding that the Bank of Japan may instead have checked currency rates, a tactic sometimes used before actual intervention to scare traders against chasing the yen higher.
"There certainly is nervousness over possible intervention. When dollar/yen briefly shot up to 82.05 yen, some wondered 'could this be it?'" said an FX analyst at a Japanese bank.
Finance Minister Yoshihiko Noda said he was monitoring moves in the yen but declined to comment on whether Tokyo had intervened in currency markets. A senior Japanese government official said speculation was behind sharp movements in the foreign exchange and stock markets.
A few traders in Singapore said a big order from a domestic Japanese investor may have had an exaggerated impact and scared the market into thinking intervention was happening during a tense point in markets, with Nikkei futures, plunging 16 per cent at one point. Nikkei futures later sharply pared their losses and were last down about nine per cent.
The dollar last stood at 81.68 yen, little changed from late US trade on Monday.
The yen was broadly higher on the crosses, however. The Australian dollar fell 1.2 per cent to 81.37 yen and the euro slipped 0.4 per cent to 113.75 yen.
"Dollar/yen was sold on the flurry of news related to the nuclear plant but seems to have found a floor for now," said an FX analyst at a Western investment bank.
"Stocks are being sold off very heavily and that has triggered flow of risk aversion in the currency market. But I don't expect panic-selling in our market unless dollar/yen breaches the post-war low or some significant level like that," the analyst added.
Japanese stocks plunged on worries about leaking radiation from the stricken Fukushima Daiichi nuclear power plant, located some 240km (150 miles) north of Tokyo, Japan's political and financial centre.
One trader said he was too preoccupied with the news of Japan's worsening nuclear safety crisis to focus on trading.
"To be honest I am in no mood to trade. Cannot think straight," said a trader for a major Japanese bank in Singapore.
Expectations that Japanese insurers and companies will repatriate funds to help pay claims and reconstruction costs in the wake of northeastern Japan's devastating earthquake had pushed the yen to a high of 80.60 yen per dollar on Monday, not far from the yen's record high of 79.75 to the dollar struck in 1995.
But market players are also wary about the potential for yen-selling intervention by Japanese authorities, given the sharp slide in Tokyo shares in the wake of Friday's devastating earthquake and Tsunami. Speculation is rising that Japan could intervene to stem the yen's gains as it could hurt the country's manufacturers, some of which are already smarting from damage from the natural disaster.
One event that could lend some support to the dollar against the yen over the longer-term is a US Federal Reserve policy meeting coming up later on Tuesday.
The Bank of Japan is even more dovish than the Fed, which has been cautious about seeking to exit its stimulus policy as it wants to bring down unemployment.
"Today's FOMC will perhaps make the difference between the Fed and the BOJ clearer. That could help the dollar/yen in the longer term," said Teppei Ino, analyst at the Bank of Tokyo-Mitsubishi UFJ.
The Bank of Japan said on Monday that it would increase the size of its asset purchase to 10 trillion yen from 5 trillion yen and analysts think it may take more steps if the economic outlook deteriorates further.
In a sign that investors were cutting back on risk-taking, U.S. stock futures slid nearly three per cent at one point, while safe-haven US Treasuries soared, with 10-year Treasuries climbing more than a full point earlier. Moves of such a degree in Asian hours are rare in those markets.
The dollar rose broadly. The dollar index, which measures its value against a basket of currencies, climbed 0.5 per cent to 76.697, pulling away from a four-month low of 76.124 hit last week.
The dollar, which investors tend to flock to in times of financial market stress, also rose against the Australian dollar, which slid 1.2 per cent to $0.9971.
Even taking into account the Australian dollar's slide of more than one per cent on the day, price swings in the foreign exchange market have been relatively mild, probably reflecting positioning in FX options, said Rob Ryan, FX strategist at BNP Paribas in Singapore.
"I know that there's a lot of gamma in the market across many, many currencies... We know euro has gamma, Aussie has gamma, even yen has gamma and much of the Asian currencies," Ryan said. When the option market is long gamma, that tends to keep currencies confined in range-trading.
"With everything else moving a lot, you have to wonder if there is the potential for a bigger move in FX," Ryan added.
The euro fell 0.4 per cent to $1.3924. The euro had climbed to a four-month high around $1.4036 earlier this month, supported by market expectations for the European Central Bank to raise interest rates soon to keep inflation in check.