The dollar climbed to a nine-month high versus the yen on Friday after data showed persistent negative price pressures in Japan that were likely to keep the Bank of Japan's focus on monetary easing and undermine the yen.
The dollar also gained against the euro, which was hurt by lingering concerns about the euro zone debt crisis.
The U.S. currency has strengthened this week after U.S. Federal Reserve Chairman Ben Bernanke stopped short of signaling more monetary stimulus to prop up the economy.
Market players contrasted Bernanke's stance with the BOJ's surprise monetary easing in February and the European Central Bank's massive injection of cheap bank funds earlier this week.
The dollar climbed to 81.718 yen on trading platform EBS, its highest level since last May, after taking out Tuesday's high of 81.661 in early European trade. It was last up 0.5 percent at 81.47 yen.
Technical analysts said next resistance was the 100-week moving average around 82.19, a level the dollar has traded below since October 2007. Traders said an option barrier at 81.75 yen was attracting protective sell orders which may prevent further dollar gains in the near term.
Yen weakness is an ongoing issue, particularly after the market's response to the Fed this week, said Steven Saywell, head of FX strategy at BNP Paribas, although he warned investors were being hasty by pricing in a less dovish Federal Reserve.
I think the market is getting ahead of itself in thinking the U.S. economy is turning a corner and the dollar is going to strengthen. Fed policy will remain very easy for several years.
BNP Paribas recommended selling the dollar at 81.15 yen and targeting 77 yen over the next six to eight weeks, with a stop loss order at 82.50.
Japan's core consumer prices fell year-on-year for the fourth consecutive month in January, suggesting mild deflation could persist this year as lacklustre wage growth curtails domestic demand.
The Japanese data is persistently deflationary and the Bank of Japan is ready to do all they can to turn inflation positive, said John Hardy, currency strategist at Saxo Bank.
But I do think dollar/yen is getting a little over-extended at these levels, he added.
The Australian dollar pushed higher against the yen, hitting a nine-month high around 88.00 although the euro was held in check against the Japanese currency.
The low-yielding yen tends to come under pressure when market optimism about the outlook for global economic growth improves. That can trigger more risk-taking among investors and increase the popularity of carry trades, in which investors sell low-yielding currencies against higher-yielding currencies.
News that Japanese brewer Asahi (2502.T) was emerging as a front-runner to buy eastern European brewer StarBev, helped support the euro versus the yen, traders said.
The euro dropped 0.7 percent against the dollar to $1.3218, with traders citing selling by an Eastern European sovereign that triggered stop loss orders around $1.3220.
News that Spain will base its 2012 budget on a deficit target of 5.8 percent of GDP, rather than the official EU-agreed objective of 4.4 percent, triggered some euro selling. Investors were concerned about the level of Spanish debt and the possibility of discord among euro zone leaders.
Analysts said the ECB's massive cash injection this week (LTRO) has made the euro more attractive to use as a funding currency to buy higher yielding assets.
While the cheap funds should ease bank funding strains and support the euro zone's sovereign bond market, investors were likely to be reluctant to buy the euro while worries over debt and growth cast a cloud over the region.
Greece has taken action needed to secure a second bailout according to Eurogroup President Jean-Claude Juncker, but the money can only be paid out on completion of a bond swap between Athens and private investors to be concluded on March 9.