The yen skidded on Friday after the Group of Seven finance ministers agreed to act to limit the currency's strength, with the dollar popping above 81 yen in a move that could put further pressure on players to unwind long yen positions.
Japanese Finance Minister Yoshihiko Noda said Japan agreed with central banks of the United States, Britain and Canada as well as the European Central Bank to jointly intervene in the currency market, the first joint action in over a decade.
Traders said the Bank of Japan was immediately spotted buying dollars versus the yen, though it seemed to be meeting heavy offers.
Were we to break up 81-81.25, it would certainly mean that the speculators who had been trying to front-run repatriation would feel very uncomfortable, said Robert Rennie, chief currency strategist at Westpac Bank.
The dollar jumped nearly 3 percent on the day to as high as 81.48 yen, extending a rebound from a record low of 76.25 yen plumbed on Thursday. The selloff in the previous session came after a break of the 1995 record low of 79.75 triggered a cascade of automatic sell orders in thin trade.
The yen has climbed steadily since last week's earthquake, as Japanese and international investors closed long positions in higher-yielding, riskier assets such as the Australian dollar, funded by cheap borrowing in the Japanese currency.
Expectations that Japanese insurers and companies will bring money home to pay for claims and reconstruction also contributed to the yen's strength.
The euro jumped 2.8 percent to 113.71 yen, while commodity currencies, such as the Australian dollar performed even better, having recently been hammered particularly hard.
The Aussie surged 3.7 percent to 80.37 yen.
WILL INTERVENTION BE SUCCESSFUL?
Some analysts doubted any intervention would be effective, given past experiences by the Bank of Japan and the Swiss National Bank.
Intervention is no panacea. Everyone knows it. Japan has a much bigger credibility problem and that'll weaken the impact, said David Gilmore, a partner in FX Analytics in Essex, Connecticut.
I don't think we've seen the low in the dollar/yen. There's still a lot of carry trade exposure. The world is really levered up on this.
Yet, other analysts said intervention may be more effective this time than it was in September when Japan spent $26 billion to weaken the yen but failed to ensure a lasting dollar rally.
This entire move can be pinned down to speculative positioning rather than any repatriation flows, said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi.
Since it is speculative, intervention in this case should work and clear out some of the long yen positions.
The cost of hedging against a further yen rise fell, with implied volatility on one-month dollar/yen trading at around 16 percent, down from near 21 percent on Thursday.
Elsewhere, the euro retreated against the dollar, but held near a 2011 high around $1.4053 set overnight after solid demand at a Spanish bond auction.
Views that euro zone interest rates were likely to rise soon also helped underpinned the common currency, which last stood at $1.3988.
The dollar bounced off a record low of 0.8852 Swiss francs at 0.9086 francs. The franc had benefited from the recent market turmoil as it is usually seen a safe port in a storm.
The franc had earlier edged up after the U.N Security Council voted to authorize a no-fly zone over Libya, prompting further gains in oil prices.
(Reporting by Ian Chua in Sydney and Wanfeng Zhou in New York; Editing by Wayne Cole)