The dollar extended its relentless rally against the Japanese currency on Friday to break above 101 to its highest since April 2009, after signs that Japanese investors are buying more foreign assets provided yet another reason to sell yen.
The dollar last bought 101.03 yen on the EBS trading platform, after scaling to 101.20. Traders said it now faces little resistance after a swathe of stops below 100 were taken out, clearing the way for the next target of 101.45, a level not seen since October 2008.
The greenback was spurred on past the psychologically important 100 yen level on Thursday after encouraging US labour data and renewed debate by officials at the US Federal Reserve about scaling back its asset purchases.
The yen's slide accelerated on Friday after Japanese government data showed domestic investors bought a net $5.2 billion of foreign bonds in the past two weeks, suggesting the Bank of Japan's radical monetary expansion campaign may be pushing them to seek higher yields overseas.
The yen has dropped about 20 percent against the dollar over the past six months on the back of central bank and government policies to revive the economy.
Analysts said strong demand at an auction for U.S. 30-year bonds was probably partly down to high participation from Japanese buyers.
"I think it's headed to 103 minimum. Now that the ceiling has been broken, there's no major resistance till 105. A 2 percent inflation target would be consistent with 104.5 to 105," said Kathy Lien, managing director at BK Asset Management in New York.
Analysts said Thursday's jump was driven more by dollar strength than yen weakness, while investors are betting on a change in fundamentals.
"The yield spread between 10-year US and Japanese bonds indicates an exchange rate of 88 yen would be reasonable, and some people argue that the yen's weakness is odd, given that the spread hasn't changed since January - but it's all about expectations," said Takako Masai, head of markets research at Shinsei Bank.
The yield spread between benchmark US and Japanese bonds could widen if the Fed reduces its $85 billion monthly purchases of bond, which some economists expect as unemployment approaches its 6.5 percent target.
Fed officials debated the merits and timing of the central bank's bond buying program on Thursday, after data showed U.S. claims for unemployment benefits at their lowest since January 2008, suggesting the Fed is making progress in brightening the employment picture.
The yen also dropped to a three-year low against the euro of 131.91 before paring losses to 131.65.
The common currency dropped 0.1 percent to $1.3033, after falling 0.9 percent on EBS on Thursday as the greenback gained across the board. The dollar index steadied at 82.799 after jumping 1 percent to a two-week high of 82.824.
The New Zealand dollar weakened after stellar jobs data allowed it to regain lost ground in the previous session. The Kiwi fell 0.6 percent to $0.8341, a touch above the six-week low of 0.8353 it plumbed on Thursday.
The Aussie slipped 0.4 percent to $1.0055, coming back under pressure since bears took charge earlier this week when the Reserve Bank of Australia cut rates to a record low. The RBA will release a statement on monetary policy later on Friday.
Australia's rate cut was part of an increasing trend for monetary easing, with the European Central Bank and South Korea also slashing rates in the past two weeks.
Some sources say this means Japan is unlikely to be singled out at this weekend's G7 meeting for attempting to weaken its currency through monetary easing.
For now, the yen bears look set to continue their dominance, as the currency's weakness convinces even Abenomics skeptics to get on the bandwagon.
"Even if people pared back their expectations of higher inflation and of Japanese investors moving overseas, the dollar is not likely to fall now," said Junya Tanase, executive director of FX research as JPMorgan.