The yen surged to its highest level in nearly five months against the dollar and rose by more than a percent against the euro, as investors fleeing Europe's debt crisis took shelter in Japan's currency despite warnings from policy makers that yen strength was unwarranted.
Greece's efforts to get private bondholders to accept a write-down hit a standstill, just as European Union leaders assemble in Brussels to hash out details on a new fiscal accord. Fears that a deal could fall through led investors to abandon the euro, and shift money out of stocks into the relative safety of U.S. Treasurys and the dollar.
Yet it was the yen that stole the spotlight, with its gains outpacing the greenback. With the U.S. currency still suffering the after-effects of last week's Federal Reserve policy decision—in which the central bank vowed to keep borrowing costs low until 2014 at least—Japan's currency emerged as the safe-harbor of choice for traders.
A broadly firmer dollar recovered nearly two cents from Friday's six-week low against the euro. Yet analysts say the greenback's slide to its lowest level since October 2011 against the yen reflected fears of more Fed easing, which is a looming risk if Europe's debt crisis worsens. Meanwhile, the single currency weakened to its lowest level since Sept. 15 against the Swiss franc.
The yen and the franc "are moving in tandem," said Tommy Molloy, chief dealer at FX Solutions, frustrating the efforts of Swiss and Japanese policy makers trying to keep currency strength from undercutting demand for exports. "Everybody likes the yen because it's not the euro."
European debt fears are forcing investors to buy "anything but the euro," Mr. Molloy said. "The ability of the Bank of Japan to defend a line in the sand seems suspect at best given the price action."
In late-afternoon trade, the euro was at $1.3128 compared with $1.3219 late Friday. The dollar was at ¥76.30, compared with ¥76.71, while the euro was at ¥100.17, compared with ¥101.45. The pound traded at $1.5701 from $1.5729, while the dollar bought 0.9181 Swiss franc from 0.9140 franc.
The ICE Dollar Index, which tracks the U.S. dollar against a basket of currencies, was at 79.16, up 0.4%.
Concerns that a Greek default could reverberate across the 17-nation currency bloc have sent Portugal's borrowing costs skyrocketing, even as government yields in Spain and Italy have fallen from recent peaks. The European Central Bank's record near €500 billion ($660.95 billion) tender in December has eased a liquidity crunch across the euro zone by infusing banks with massive amounts of cash.
Yet Portugal's fate is linked to the outcome of Greece's negotiations. Even if Greece is able to secure a multibillion deal to write down its debt, the country's commitment to broad economic reforms is in question. Germany has floated the idea of appointing an EU commissioner to oversee Greece's finances, but Greek officials quickly rejected the idea as an imposition on the country's sovereignty.
A parade of leaders assembled at a Brussels summit to finalize an accord on tighter fiscal rules took the opportunity to urge the Hellenic republic to make good on its reform efforts, or risk jeopardizing future funding.
Andrew Busch, global foreign exchange strategist at BMO Capital Markets in Chicago, said that Greece "is the progenitor of the euro zone's debt drama. Given this status, it is pure prudence to have someone from the EU step in to assist with the execution of the reforms."
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