The dollar edged lower versus the yen on Tuesday, taking a breather after surging to a seven-year high the previous day in the wake of last week’s surprise monetary easing by the Bank of Japan.

The dollar fell 0.4 per cent to 113.55 yen. It rose to a high of 114.21 yen on Monday, its strongest level since December 2007 and nearing that month’s peak of 114.66 yen.

A divergence in the monetary policies of major central banks has helped lift the greenback, with the US Federal Reserve having just turned off its massive bond-buying programme, while the Bank of Japan jolted financial markets on Friday by deciding to expand its asset purchase programme.

BoJ's stimulus programme

The BoJ’s move has also sparked speculation that the European Central Bank would have to step up its policy easing measures, further underpinning the dollar.

“The market is taking a bit of a breather...but in terms of the direction, I think we’re still in the stage of testing how far it can go,’’ said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore, adding that the dollar could rise further against the yen by year-end.

US jobs data

While the dollar is likely to retreat against the yen if US jobs data due on Friday were to come in weaker than expected, any decline will probably prove to be a temporary setback for the US currency, Okagawa added.

The greenback had surged 4.4 per cent versus the yen on Friday and Monday combined as the yen slid after the BoJ unexpectedly ramped up its monetary stimulus.

“Investors who missed the initial move are positioning themselves for the next lurch higher, and calls for USD/JPY at 120.00 abound,’’ said Raiko Shareef, currency strategist at Bank of New Zealand.

On Tuesday, however, the dollar took a pause from its rally, a move that traders attributed to profit-taking.

Dollar vs other currencies

Against a basket of major currencies, the dollar fell 0.2 per cent to 87.132, edging away from Monday’s peak of 87.406, which was the highest for the dollar index since June 2010.

The euro rose 0.3 per cent to $1.2519, regaining some footing in the wake of its drop on Monday to a two-year low of $1.2439.

The Australian dollar gained 0.5 per cent to $0.8723 , having bounced back from an intraday low of $0.8644, which was right near a four-year low of $0.8642 touched in early October.

The Aussie dollar extended its gains after Australia's central bank refrained from escalating its verbal campaign for a lower currency in its post-meeting statement on Tuesday. The Reserve Bank of Australia kept interest rates at a record low of 2.5 per cent as expected.

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