The dollar climbed to as high as 116.66 yen in early Asian trade, the highest level since September 2003.

It later eased back to 116.48 yen in late Tokyo trade, compared with 116.37 yen in New York late Monday.

"It seems that the market is now eyeing the 118 yen level as a major upside target (for the dollar)," said Bank of Tokyo Mitsubishi chief strategist Osamu Takashima.

The euro slipped to 1.1977 dollars here from 1.1990 dollars in New York and was flat at 139.52 yen.

The US Federal Open Market Committee was expected to boost the federal funds rate by 25 basis points to 4.0 percent at its meeting later Tuesday, sticking to Fed chairman Alan Greenspan's policy of gradual rate hikes.

The currency market barely reacted to Japanese Prime Minister Junichiro Koizumi's cabinet reshuffle Monday which contained no big surprises, favouring outspoken conservatives and reformists, dealers said.

A technical glitch that caused a suspension of trading at the Tokyo Stock Exchange Tuesday also had a negligible impact on the yen, they added.

The dollar was said to have garnered strength from a strong regional US manufacturing survey released Monday along with fresh signs of higher inflation.

A report on US spending and income showed additional strength and a key inflation indicator in that report suggested the Federal Reserve would stick to its policy of gradual rate hikes.

In afternoon trade, the dollar was mixed at 1,042 South Korea won, down from 1,043.6 on Monday, at 40.815 baht after 40.775 and at 1.6946 Singapore dollars after 1.6919.