The yen surged against the dollar and euro on Thursday as fears of a financial meltdown in Cyprus spurred investors to sell riskier trades funded by the low-yielding Japanese currency.
The euro fell for a third day out of four this week against the dollar, partly also hit by disappointing euro zone economic data, though it recouped some losses in afternoon trade.
The European Union gave Cyprus till Monday to raise the billions of euros it needs to secure an international bailout or face a collapse of its financial system that could push it out of the euro currency zone.
"There's obviously some risk aversion based on the Cyprus situation," said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank in New York.
The yen tends to strengthen in times of market stress, behaving like a "safe haven" currency, as investors sell assets like stocks and higher-yielding currencies and buy back the yen.
The prospect of further aggressive monetary easing in Japan has made the yen a favorite funding currency for such trades.
The dollar fell 1.2 percent to 94.89 yen, having fallen as low as 94.56 yen, according to Reuters data. At current prices, it's on track for the biggest daily drop since Feb. 25.
Against the dollar, the euro slid 0.3 percent to $1.2896, moving away from a session low of $1.2879 but not far from a near four-month trough of $1.2843 hit on Tuesday. Near-term support lay around the 200-day moving average for the euro against the dollar around $1.2877, with most investors looking to sell into any bounce toward the $1.30 level.
Data showing the euro zone's economic downturn deepened, even before Cyprus' bailout debacle, added to worries about the bloc's growth outlook and also pressured the single currency.
Germany's composite PMI fell in March, although it held above the 50 line that separates growth from contraction. But in France, the bloc's second-biggest economy, it sank to a four-year low.
"The uncertain situation in Cyprus and the dour euro zone economic data are the key issues here, and these are two reasons not to be buying the euro at this time," said Greg Moore, currency strategist at TD Securities in Toronto.
The yen fell briefly after new Bank of Japan Governor Haruhiko Kuroda vowed to take all possible measures available to achieve its 2 percent inflation goal in about two years. But the move was short-lived as Kuroda also said the BOJ does not have to rely on currency moves to escape deflation.
(Read More: Is Kuroda About to Deliver Bold Action?)
He offered little insight on whether he will call for an early policy board meeting ahead of the bank's next scheduled meeting on April 3-4.
BNP Paribas currency strategist Vassili Serebriakov said Kuroda's comments were less dovish than markets had anticipated. "The market has a very high bar for dovishness from the BOJ, so when he said that the bank does not need to rely on a weak yen to beat deflation, that kind of was a letdown."
Analysts said the latest bounce in the yen could attract more sellers as market expectations for aggressive monetary easing by the BOJ remained intact.
The dollar rallied against the yen on Wednesday after a decision by the Federal Reserve to continue its aggressive monetary easing fueled optimism about the U.S. economic recovery. So far this year, it has strengthened 9.4 percent.