US economic data the previous session showing surprisingly strong Midwest business activity in October and a pick-up in the Fed's favoured inflation gauge in September underscored expectations for more rate increases.
Investors were looking to see if the Fed tweaks its post-meeting statement, either in alluding to future policy moves or discussing inflation pressures, when the central bank announces its policy decision around 1915 GMT.
"What the market is focusing on now is whether the Fed makes any changes in its statement regarding the measured pace of rate tightening," said Daisuke Uno, market analyst at Sumitomo Mitsui Banking Corp.
During its non-stop credit tightening campaign over the past 16 months, the Fed has repeatedly indicated that more "measured" increases were ahead.
The fed funds rate is widely expected to rise to 4 percent from 3.75 percent, and more economists see the rate climbing to 4.5 percent or even 5 percent next year as Fed officials have expressed more alarm about inflation accelerating.
The yen has suffered the most despite signs of a sustained economic recovery and the Bank of Japan's own steps toward scrapping its ultra-loose monetary policy, as Japanese rates are not seen rising much from zero for a while.
In the BOJ's semi-annual outlook for the economy on Monday, the central bank raised its forecast for growth and inflation but said rates would remain extremely low even after ending quantitative easing.
A rally in Tokyo shares that drove the broad TOPIX index to five-year highs offered little relief to the yen.
Toru Umemoto, chief forex strategist at Barclays Capital in Tokyo, said the combination of Japan's shrinking trade surplus and domestic investors' big appetite for higher-yielding foreign bonds would put more pressure on the yen to fall further.
"This trend is very likely to continue," said Umemoto, who has forecast a dollar/yen rate at 120 by the end of this year and 125 next year.
The dollar was changing hands around 116.55 yen after having earlier surged through suspected option barriers near that level to 116.68 yen on electronic trading system EBS, the highest since September 2003.
The dollar had ended US trade on Monday at 116.40 yen, up around 0.5 percent on the day.
The euro slipped to $1.1980 from $1.1993 in late New York trade and has been stuck roughly between $1.19 and $1.22 over the past six weeks.
Against the Japanese currency, the euro was barely changed at 139.55 yen, in sight of a six-month high of 140.20 yen hit last week.
Before the Fed announcement, the Institute for Supply Management's October PMI of national manufacturing activity at 1500 GMT is forecast to dip to 57.0, still indicating a robust pace of growth, from 59.4 the previous month.
The euro zone PMI at 0900 GMT is also seen providing evidence of recovery in the region's economy, with forecasts for an improvement to 52.6 in October from 51.7 in September.
The dollar's widening yield advantage on the Fed's rate rises has powered a rally this year, though the European Central Bank also appears to be gearing up for raising rates.
ECB officials have stepped up their inflation-fighting rhetoric in the past few weeks, prompting markets to bet the central bank could lift euro zone rates - stuck at a record low 2 percent for more than two years - as soon as December.
If such a rate increase is in the cards, the ECB would likely give hints at its own policy meeting on Thursday.