The yen soared to a record high against the dollar on Thursday before pulling back to near 80, surging in chaotic trading as a break of the previous peak triggered a cascade of stop-loss and algorithmic sales.
A stronger currency risks compounding Japan's economic troubles at a time it is struggling to contain a worsening nuclear crisis, convincing many market players it was only a matter of time before Japanese authorities intervened against further yen strength.
Japanese importers and other short-term players stepped in to buy dollars, helping lift the U.S. currency back up to 79.65 yen from an all-time low of 76.25 touched on EBS.
Junya Tanase, foreign exchange strategist at JPMorgan Chase in Tokyo, said there was a feeling in the market that the moves had gone too far in a short period of time, but that intervention was likely.
There is real possibility that authorities would intervene to calm the markets though I don't think it will be heavy, Tanase said.
Japan's finance minister blamed speculation for the yen spike higher and said he was closely watching markets, a warning that the Bank of Japan may soon be given the signal to buy dollars.
Group of Seven nations will discuss late on Thursday possible steps to calm markets roiled by Japan's crisis, with a source telling Reuters a conference call was scheduled later in the day.
FX analysts at Citigroup said there was an extremely high risk of intervention in the next 24 hours.
While the escalating nuclear crisis and subsequent rush for safety was the initial spur for the move, the yen's lunge higher was almost all about positioning.
All sorts of exotic option and structured products were stopped-out, while many Japanese margin traders were forced to bail from leveraged long trades.
Traders said that the unwind of Japanese individual trader bets in favor of the dollar had caused much of the move in the thin trading conditions between the end of the U.S. trading day and start of Asian trade.
Just the day before, Japanese margin traders had built up record high long positions in dollar/yen totaling $2.8 billion, according to data from the Tokyo Financial Exchange.
During the surge, traders said the market was disorderly. Liquidity evaporated and bids were pulled, leaving huge gaps in the charts.
It's mayhem out there, said one trader at an Australian bank in Sydney. The yen's been moving a big figure a second on occasions. A lot of people are crying out for the central banks to step in.
The dollar's collapse to 76.25 on EBS cracked the previous record of 79.75 struck in 1995 in the months following the Kobe earthquake.
The yen also flew on the crosses, jumping around 6 big figures on the Aussie to as far as 74.50 yen, a six-month high, before clawing back to 78.05 yen.
The Aussie has shed over 7 percent against the yen so far this week as investors sell it as proxy for risk and global growth.
An unwind of yen-funded carry trades has driven the Japanese currency higher all week, with few signs yet of the Japanese investor repatriation of funds in foreign assets that many are expecting to help cover costs from the crisis.
Japanese officials played down the risks of such repatriation on Thursday, with Economics Minister Kaoru Yosano saying the yen was driven by speculative moves and not repatriation.
I would assume that certainly the carry trade is being unwound, said Dan Fuss, vice chairman of Loomis Sayles, which oversees $150 billion in assets.
The Aussie was at $0.9795 and fell as far as $0.9705 on Thomson Reuters Matching, a three-month low and a huge reversal from $1.0143 at the end of last week.
The euro/dollar pair was a relative sideshow at $1.3900.
Japan's nuclear crisis reached a new danger level as a U.S. official said one of the pools containing highly radioactive spent fuel rods at the stricken plant had run dry.
(Additional reporting by Kazunori Takada in Shanghai, Ian Chua in Sydney and Masayuki Kitano in Tokyo, Writing by Eric Burroughs; Editing by Richard Borsuk)