The euro inched up in Asian trading on Tuesday as traders kept a close eye on the Fed's two-day policy meeting.
The 17-nation currency bought $1.2952 and 106.65 yen, up from $1.2939 and 106.53 yen in New York late Monday after falling due to worries over Italian Prime Minister Mario Monti's decision to quit.
The dollar bought 82.32 yen, nearly flat with 82.33 yen in US trading.
Investors are betting that the US Federal Reserve would provide more stimulus to boost the limping US economy at its rate-setting meeting this week, which would tend to weigh on the greenback.
The US central bank's policy-setting Federal Open Market Committee opens a two-day meeting Tuesday, as stubbornly high unemployment and the looming fiscal cliff budgetary impasse give the Fed more reasons to expand its stimulus efforts, analysts said.
Markets were watching for news of a breakthrough budget deal in Washington where a deeply divided Congress is debating a new spending agreement to avert fiscal cliff package of deep spending cuts and tax hikes due to come into effect on January 1.
"No news of breakthrough on fiscal cliff negotiations though the White House continues to express optimism a deal can be reached," National Australia Bank said in a note.
The bank added that the market's surprise at Monti's resignation announcement at the weekend was "understandable" but added that it "should not be dramatised".
Monti, who has been widely credited with putting Italy on a firmer fiscal footing, sought to calm jittery markets on Monday, saying the country's next government would be "highly responsible" and "Europe-oriented".
Dollar-yen trading was factoring in Sunday elections in Japan where main opposition leader Shinzo Abe is widely expected to become the country's next prime minister.
Abe has repeatedly said he would pressure the Bank of Japan (BoJ) for more aggressive easing measures if elected, comments that have helped put downward pressure on the Japanese currency.
On Monday, official data indicated Japan is on the verge slipping into a recession, adding to fears about the health of the world's third-largest economy and fuelling speculation over further central bank easing.
The BoJ releases its closely watched Tankan survey of corporate confidence this week.
The dollar was mixed against other Asia-Pacific currencies.
It fell to 1,077.25 South Korean won from 1,079.55 won on Monday, to 54.32 Indian rupees from 54.41 rupees, to Sg$1.2222 from Sg$1.2224, to 40.93 Philippine pesos from 40.96 pesos, and to 30.64 Thai baht from 30.68 baht.
The greenback rose to 9,714 Indonesia rupiah from 9,650 rupiah while holding steady at Tw$29.08.
The Australian dollar firmed to US$1.0482 from US$1.0475 while China's yuan edged down to 13.18 yen from 13.21 yen.