This week's sharp rebound in the yen suggests the currency's steep downtrend that began in November on the back of calls for aggressive monetary easing in Japan may well be over as uncertainty and fear return to the market, a strategist told CNBC.
Political deadlock in Italy, following inconclusive elections this week, has sparked fears of a fresh crisis in the euro zone and has sent investors scurrying out of risk assets and into safe havens such as the yen.
Japan's currency, which on Monday traded at its weakest level since May 2010 at about 94.76 per U.S. dollar, has strengthened almost 3 percent from there. Its move against the euro has been even more pronounced, with the yen strengthening more than 4 percent in the hours following the Italian election results which emerged Tuesday.
(Read More: Sharp Yen Rebound a Challenge to 'Abenomics')
"Barring natural disasters, I have not seen an ugly move like that in about four-to-five years in dollar/yen," Ed Ponsi, managing director at Barchetta Capital Management told CNBC Asia's "Squawk Box" on Wednesday.
"It felt like a risk off move and all of a sudden "Abenomics" and who will be the next Bank of Japan governor didn't matter," Ponsi said, referring to the economic policies of Japan's new prime minister Shinzo Abe and his calls for aggressive monetary policy that have driven the yen lower against major currencies since November.
Currency markets stabilized on Tuesday and the yen was steady around 92 per dollar in early Asia trade on Wednesday.
Still, Ponsi said the selling in dollar/yen early in the week was so heavy that it has raised the prospect of a further unwinding of the short-yen trade that has dominated currency trading in recent months.
"It seemed like there was a very nasty undercurrent that caught the yen and took out about a month worth of gains in dollar/yen," said Ponsi.
"That's very disconcerting because when you have such a hard selloff (in dollar/yen), it reminds you of the dark days following (the collapse of investment bank) Lehman Brothers (in 2008) and you begin to wonder if the move is really over or whether today (Wednesday) was just the calm before the next leg down," he said.
(Read More: Just Like That, Safe Havens Are Back in Favor)
Ponsi added that while the push for an ultra-easy monetary policy in Japan and the likely nomination of Haruhiko Kuroda, an advocate of aggressive easing, as the next Bank of Japan governor pointed to further weakness in the yen, the outlook for the currency suddenly appeared uncertain.
Kelvin Tay, regional chief investment officer at UBS Wealth Management, said the outlook for the yen was "tricky" following the currency's strengthening in the wake of the Italian election results.
"Once Kuroda comes in (as Bank of Japan governor) the yen is likely to stabilize around the 85 to 90 area on a short-term basis," he said.
(Read More: Will the Yen Find a Floor at 95?)
- By CNBC.Com's Dhara Ranasinghe, follow her on Twitter : @DharaCNBC