The yen edged higher on Tuesday as a fall in oil prices dented risk appetite and prompted investors to trim short positions in the Japanese currency.
Commodity currencies extended their recent losses, with the Australian dollar setting a four-year low, while the Canadian dollar hit a five-year trough versus the U.S. dollar.
Against the yen, the greenback fell 0.4 percent to 120.25 yen JPY=, pulling further away from a seven-year high of 121.86 yen set on Monday. The yen also rose versus the euro, which shed 0.5 percent to around 148.02 yen EURJPY=R.
The dollar may retreat further versus the yen in the near term due to the potential for more position squaring in the wake of its recent rally, said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.
"The size of volatility in the dollar's moves versus the yen has become quite stark," Murata said, adding that choppy trading conditions could persist toward the year-end.
"I think we may even see levels around 119.50 yen or so today," he said.
The dollar's rise to a seven-year high on Monday marked a gain of about 11 percent versus the yen after the Bank of Japan expanded its monetary stimulus at the end of October.
Commodity currencies remained under pressure, with the Australian dollar touching a four-year low at one point and last trading at $0.8241 AUD=D4, down 0.7 percent on the day.
The Canadian dollar slipped to as low as C$1.1501 CAD=D4 versus the U.S. dollar earlier on Tuesday, its lowest level since July 2009, as oil prices hit five-year lows.
Market participants said the U.S. dollar remained supported by expectations for the Federal Reserve to raise interest rates some time next year.
Earlier on Tuesday, the dollar had gained a lift from a Wall Street Journal report saying that Fed officials are seriously considering dropping an assurance that short-term interest rates will stay near zero for a "considerable time", when the Fed issues its policy statement next week.
The Fed's policy meeting takes place on Dec. 16-17.
Against a basket of major currencies, the dollar edged up 0.1 percent to 89.104 .DXY. On Monday the dollar index had set a five-year high at 89.55.
The euro held steady at about $1.2313 EUR=, staying above a two-year low of $1.2247 set on Monday.
Investors were likely to remain wary of buying the common currency amid speculation that the European Central Bank (ECB) was poised to ease policy further early next year.
Executive Board member Benoit Coeure kept those expectations alive on Monday, saying policymakers last week agreed unanimously to assess how and when to react to downward inflation risks in early 2015, and that they could then change their asset buying plans.
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