The yen climbed off a five-month low against the euro yesterday, but investors will be looking to cash in on any rebound to start selling-off the Japanese currency again.
"There has been a significant rise in short yen positions so we are seeing a bit of a pullback ahead of a holiday in Japan," said Jeremy Stretch, head of currency strategy at CIBC World Markets. Japanese markets will be shut for a holiday today.
"These are opportunities to initiate fresh bearish positions and we expect dollar/yen to rise towards 85-85.50 yen while the euro having hit a high above 110 yen, is likely to consolidate."
Net shorts in the yen have risen significantly over the past three weeks. With Greek-related risks in the Eurozone taking a breather, the euro has been supported against the safe-haven yen, while the Federal Reserve's not-so-dovish outlook has given dollar bulls a boost.
But given a sharp drop in recent days, the Japanese currency was due for some respite, traders said.
The euro was last changing hands at 109.45 yen, down 0.5 per cent on the day, after rising to as high as 110.15 yen in the Asian session on trading platform EBS, its highest level since late October.
The Bank of Japan's surprise easing last month has boosted the yen's appeal as the currency of choice to fund carry trades.