The yen hit multi-month lows against the dollar and euro on Friday, hurt by reported selling by Japanese importers, although market players warned rock-bottom U.S. government bond yields may slow the pace of more losses versus the dollar.
The euro extended a surge to a 2-1/2 month high against the dollar in the wake of better-than-expected German data on Thursday which led investors to close some bets on losses for the single currency.
So far this month the dollar has rallied around 5 percent against the yen, helped by monetary easing from the Bank of Japan as well as Japan's shrinking current account surplus, exacerbated by rising crude oil prices.
The greenback rose to a session high of 80.71 yen, pulling further away from the 2012 low of 76.03 hit on February 1. It was last up 0.8 percent on the day at 80.51 yen.
Short-term players triggered weak stop-loss orders above Wednesday's peak of 80.41, helping the dollar break above a major chart resistance point of 80.42 yen, which is the 50 percent retracement of its fall from the 2011 high around 85.50 yen to the all-time low of 75.31 yen.
The move in dollar/yen came because the Bank of Japan's easing policy came as a surprise to the market, said Steve Barrow, currency analyst at Standard Bank.
However, he said the limited scope for a further widening in Japanese-U.S. yield differentials meant it wouldn't move too much higher. Dollar/yen traditionally has a strong correlation with short-term Japanese-U.S. yield spreads.
Probably in the short-term it will turn around because there is a danger of risk aversion coming back in that could support the yen.
U.S. Treasury yields are not expected to rise much further due to the Federal Reserve's pledge to keep rates exceptionally low until at least 2014, while Japanese 2-year government bonds are already extremely low.
Traders are talking about a move to 82 yen, but the interesting thing will be to see what happens after that. U.S. yields have not really justified the move, said Geoff Kendrick, FX analyst at Nomura.
But he said as long as U.S. data held up, dollar/yen could keep grinding higher.
The euro rose 1 percent against the yen to a fresh 3-1/2 month high of 108.16, more than 10 yen off this year's low of 97.04 yen hit on January 16.
Meanwhile, the dollar hit a near 3-1/2 month trough against the Swiss franc of 0.8972 francs, with the Swiss currency being seen as an alternative safe haven to the yen after the Bank of Japan's easing measures.
EURO GAINS VS DOLLAR
Against the dollar the euro extended hefty gains made a day earlier after an improved German Ifo business sentiment survey triggered a short-covering rally, where players give up on bets that the currency will weaken.
The euro was last up 0.3 percent on the day at $1.3411, just off a peak of $1.3425, its strongest since December 9.
Market players said the euro rally had good momentum after it broke through the 100-day moving average around $1.3306 on Thursday, and took out a reported option barrier at $1.34 in early European trade on Friday.
Analysts said the euro's resilience was helped by better risk appetite ahead of the European Central Bank's second long-term, low-rate refinancing operation next week, while traders also reported broad dollar selling except versus the yen.
Banks are expected to borrow around half a trillion euros and while the funds were likely to boost the euro in the short-term, the extra liquidity could store up problems in future.
The huge mass of liquidity pumped into the market is some kind of relief in the short-term, if you have enough liquidity equities will always be happy, said Lutz Karpowitz, currency analyst at Commerzbank.
But we are definitely going to face inflationary pressures in the future.
Worries about the euro zone economy were expected to remain. Although the Ifo data raised hopes the German economy was picking up, the European Commission warned the euro zone as a whole is likely to be heading for recession.