The yen rallied against key currencies yesterday as investors started to unwind positions that had been built on the Japanese unit's low-yielding status.
Other Asian currencies rose, lifted by a rebound in the yen and a rally in regional equity markets.
The Australian dollar suffered the most damage against the yen, falling 2 per cent on the day after Australian inflation data raised the possibility that the central bank may have ended monetary tightening.
The British pound also fell victim to short covering, tumbling from 14-year peaks against the yen and the US dollar as markets interpreted comments late on Tuesday from Bank of England governor Mervyn King as being bearish on the outlook for interest rates.
Mr King said early action from policymakers would ultimately save Britain from much higher interest rates.
The Australian dollar was down 1.3 per cent at 78.19 US cents in morning trade.
It was down 2 per cent at 94.45 yen while pound fell 1 per cent to 238.53 yen.
Against the US dollar, the pound was down 0.4 per cent at US$1.9737, pulling back sharply from Tuesday's 14-year peak at US$1.9917.
The euro fell 0.9 per cent to 156.95 yen, having hit a record high of 158.61 yen in Asian trading on Tuesday. .
The US dollar rose as high as 121.79 yen, almost touching a four-year high of 121.80 yen hit earlier this week, but profit taking and selling to protect option barriers pushed the US currency back to 120.86 yen.
The Australian dollar fell as much as 1.2 per cent against the US dollar after Australia's underlying inflation rate slowed more than expected in the fourth quarter while consumer prices fell for the first time in eight years, sharply reducing the chance of another rise in interest rates.
Mixed interpretations of Mr King's comments put the spotlight firmly on minutes from the Bank of England's last policy meeting, which produced a surprise rate rise to 5.25 per cent.
In Asian trading yesterday, the South Korean won firmed as much as 0.43 per cent to about 936 per US dollar.
The Taiwan dollar strengthened to as much as NT$32.795 to the greenback - up almost 0.7 per cent from Tuesday's 2?-month low.
The Singapore dollar and the Indonesian rupiah strengthened against the greenback about 0.33 per cent each.
Analysts said the near-term outlook for Asian currencies would be driven by what happens to the yen and carry trades - the selling of the low-yielding yen to fund investments in higher-yielding units.
'What we are watching is whether the yield carry story develops into a dollar story,' DBS Bank currency strategist Philip Wee said.
The Malaysian ringgit, which hit a nine-year peak against the dollar this month and has outperformed other Asian currencies, hovered around the 3.50 per dollar level.
Dealers suspected that central bank intervention had prevented the ringgit from strengthening beyond this key chart level.
A decisive break is expected to set the Malaysian currency up for a further sharp move higher against the US dollar.
'It looks like the central bank is there near 3.5. They have been there in the past week,' said Odie Lee, a trader at Bayerische Hypo und Vereinsbank.