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The yen firmed on Thursday, returning towards a four-month peak against the dollar hit earlier in the week after the Bank of Japan's surprise tweak to its bond yield control spurred bullish yen bets, while the dollar moved broadly lower.

The yen rose about 0.5% to 131.85 per dollar, after surging to a four-month high of 130.58 on Tuesday in the aftermath of the BOJ's decision to allow the 10-year bond yield to move 50 basis points either side of its 0% target, wider than the previous 25 basis point band.

The greenback, which rose 0.6% against the yen in the previous session, had failed to meaningfully recoup the 3.8% slump that followed Tuesday's news.

"The BOJ opened the door, obviously, for further unwinding of its super-loose policies," said Sean Callow, a senior currency strategist at Westpac.

"It's a case of what's the price action on the yen? Do people want to try to keep pounding at (dollar/yen), having absorbed the shock of Tuesday?"

Against the euro, the yen steadied at 140.34, while trading at 159.82 per pound. Both pairs were holding close to roughly three-month peaks hit on Tuesday.

The dollar softened, due to a pickup in risk sentiment after upbeat data showing U.S. consumer confidence rose to an eight-month high in December, as inflation retreated and the labour market remained strong.

The Aussie climbed 0.66% to $0.6752, while the kiwi gained 0.26% to $0.6311.

The euro was last 0.31% higher at $1.0638. Against a basket of currencies, the U.S. dollar index fell 0.3% to 103.92.

"Confidence returned to markets as Christmas came early in the form of an unexpected and broad-based surge in U.S. consumer confidence," said Vishnu Varathan, head of economics and strategy at Mizuho Bank.

Sterling rose 0.32% to $1.2123, partially reversing its 0.85% overnight fall.

British public borrowing unexpectedly jumped last month to its highest for any November on record, figures overnight showed, underscoring challenges for the economy.

"The borrowing figures are just a reminder of what a difficult position the UK is in, fiscally," said Westpac's Callow.

"In a world where risk sentiment is still very fragile, currencies whose countries have a twin deficit are at risk compared to others."

In Asia, the Chinese offshore yuan was marginally higher at 6.9828 per dollar, although sentiment remains weighed down by the spread of COVID-19 across the country.

China's economy was badly hurt by its stringent COVID-related restrictions, but state media on Wednesday quoted the cabinet as saying that the country will seize the time window to implement policy measures to support the economy, aiming for an improvement in growth in early 2023.