NEW YORK (CNNfn) - The dollar fell more than 1 percent against the yen Tuesday after Japan's central bank decided against weakening the country's currency.
Treasury bonds, meanwhile, edged lower with the dollar, unaffected by a report showing another record trade deficit.
Just before 3:15 p.m., ET, the dollar fell to 104.83 yen from 105.95 Monday, a 1.06 percent drop in the dollar's value. The U.S. currency also weakened against the euro. It cost $1.0485 to buy one euro Tuesday compared with $1.0357 Monday, a 1.24 percent slide in the dollar's value.
Traders snapped up the Japanese currency immediately after the Bank of Japan decided against enlarging the nation's money supply to halt the currency's climb.
The decision surprised analysts, who fear the yen's continued rebound could make Japan's exports tougher to sell, slowing the economic recovery of the world's second-largest economy.
"There's a good deal of worry as to whether or not an overly strong yen might jeopardize this early stage of Japan's economic recovery," said John Lonski, bond market strategist at Moody's Investors Service.
Greg Mount, senior international economist at Banc One, agreed.
"It's a problem in terms that we really want the Japanese economy to recover," Mount said. "Japan needs to begin to restart its export machine. And it will be unable to do so unless it has a competitive yen."
U.S. officials, meanwhile, fret that a climbing yen will lead to a rise in import prices, exacerbating inflation and increasing the odds of a Federal Reserve interest rate hike.
Bonds edge lower
Bonds Tuesday fell in tandem with the dollar, which last week hit a 3-1/2-year low vs. the Japanese yen.
The dollar's slide hurts Treasurys as overseas investors, who hold about a third of U.S government debt, are prone to sell government securities to buy yen-denominated investments. This buying, in turn, has helped Japanese stocks make solid gains this summer. Those gains continued Tuesday, with the Nikkei stock index climbing 357.5 points, or 2 percent, to17,932.79.
"If you get foreigners moving money out of U.S. Treasuries in a quick way, then you are talking about interest rates moving up quite a bit, maybe 150 basis points," said Jim Melcher, president of Balestra Capital.
Further, a falling dollar stokes fears that more expensive imports will spark inflation, which erodes the value of a bond's fixed income payments.
Just before 3:15 p.m., ET, the price of the benchmark 30-year Treasury bond fell 9/32 to 100-13/32. Its yield, which moves inversely to the price, rose to 6.09 percent from 6.06 percent Monday.
The day's only economic indicator, the July trade balance, showed that strong demand from American consumers led to surge in imports. The nation's trade deficit widened to a record $25.2 billion in July, the Commerce Department said.
Although some saw the big deficit, with its suggestion that the economy continues to strengthen, as increasing the chances of a Federal Reserve interest rate hike, bonds showed little reaction to the report.
"The markets are concerned that robust growth in the U.S. will eventually lead to inflation and actions by the Fed," Balestra Capital's Melcher said.
Still, the interest rate picture remains clouded by a series of conflicting economic data. In recent weeks, consumer prices, producer prices and employment data have all come in weaker than expected. These figures, with their suggestion that inflation remains tame, are seen as lessening the chances the Federal Reserve will hike interest rates at its next meeting Oct. 5.
On the other hand, recent reports have shown strength in retail sales, housing, manufacturing and factory orders.
Ahead Wednesday, the Federal Reserve releases its "beige book" -- a compilation of economic observations compiled by the Fed's 12 regional banks. 
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