The yen tumbled 2 percent against the dollar to hit a 2 1/2-year low on Thursday after a Japanese economic official said the government has no problem with the dollar hitting 100 yen.
The yen has lost more than 10 percent of its value since November, weakening to about 90.50 per dollar from 80, on expectations that the new prime minister, Shinzo Abe, will force the central bank to ease monetary policy to combat deflation.
But the yen's decline stalled earlier this week after the Bank of Japan said its open-ended commitment to buy assets would kick in only next year, disappointing investors who had expected far more aggressive easing measures.
"That disappointment only opened the door for bargain hunters who are now driving yen crosses up again due to the fact that Abenomics is still in play, and it will likely continue," said Neal Gilbert, market strategist at GFT in Grand Rapids, Mich. "Prime Minister Shinzo Abe and his Cabinet members are now aiming for 100.00 on the dollar/yen, and we can expect more verbal, political and monetary rhetoric until that goal is reached."
The dollar rose 2 percent to 90.36 yen, a day after hitting a one-week low of 88.03 yen. At current prices, it is the biggest one-day percentage gain since Oct. 31, 2011.
The dollar had risen as high as 90.54 yen on Reuters data, the strongest since June 2010. Gains accelerated after the pair broke above resistance at 90.25, the high on Monday.
Traders cited reports quoting Japan's deputy economy minister, Yasutoshi Nishimura, as saying the yen's decline is not over and a dollar/yen level of 100 would not be a concern. Nishimura was also quoted saying that only if the dollar rises to 110-120 yen would it add to domestic import costs.
"At some stage, the ability of this jaw-boning and verbal intervention to drive the yen lower will become subject to diminishing returns, but that does not appear to be the case yet," said Bob Lynch, chief currency strategist at HSBC in New York.
A record trade deficit for Japan and comments by Abe that he expected the Bank of Japan to achieve its 2 percent inflation goal as soon as possible added to selling pressure.
Strong readings on the U.S. economy showing the number of new claims for jobless benefits dropped to a five-year low last week lifted U.S. bond yields, which also helped the dollar against the yen.
The euro rallied 2.5 percent to 120.91 yen, having risen to 121.06 yen on Reuters data, a 21-month high.
Traders cited Asian central banks as major buyers of the euro as they stepped up yen selling.
Against the dollar, the euro rose 0.5 percent to $1.3377, not far from the 11-month high of $1.3403 hit on Jan. 14, which is acting as near-term resistance.
Support was cited at $1.3250, near lows touched on Jan. 11. Private-sector activity data highlighted the diverging fortunes of the bloc's biggest economies.
Weak performance in France was offset by numbers out of Germany showing that its private sector expanded at the fastest rate in a year.
"The better PMI reading suggests a euro zone economy that is starting to stabilize," said Aroop Chatterjee, currency strategist at Barclays Capital in New York. "It's not out of the woods yet, but the economic and financial conditions are certainly better now than last year."
Traders said macro funds and asset managers were buying the euro, and if data continued to show prospects for the region were improving, the currency could rise further.
Some analysts said the announcement on the size of next week's first repayments of cheap three-year loans taken by banks from the European Central Bank just over a year ago could give the euro a bit of a lift.
Banks took more than 1 trillion euros in the long-term refinancing operation loans from the ECB. A Reuters poll showed traders expected about 100 billion to be paid back next week.
Option traders reported strong demand for euro calls — bets that the euro will rise — for expiry on Friday.