The U.S. dollar soared to its highest level against the yen in over four years on Thursday after signs the American labor market improved further and in the wake of renewed debate by Federal Reserve officials about scaling back bond buying.
The dollar, up 16 percent against the Japanese currency so far this year, started climbing after data showed U.S. claims for unemployment benefits fell to the lowest level since January 2008, suggesting the Federal Reserve is making progress in reducing the jobless rate.
The dollar gains accelerated late in the session though as options barriers strongly defended over the past month were taken out.
Currency investors also chose to fund purchases of emerging-market currencies by selling the yen, a trader said. Speculation that Japanese investors may have participated in a 30-year U.S. Treasury bond sale also favored dollar strength, according to Vassili Serebriakov, fx stratgist at BNP Paribas in New York.
"People for weeks have been anticipating Japanese flows into the U.S. and the increase in indirect bids for the 30-year bond sale raised speculation that they were buyers," he said. "Having said that, there was not a fundamental trigger today, although the U.S. jobless claims data contributed to dollar strength."
"The fact that the dollar hit 100 yen is really not surprising, but once it was broken, dollar gains accelerated," he said. "A lot of options barriers were broken at 100 yen mark and short covering also came into play." Investors place stop-loss orders as a way to protect their portfolios from outsized losses.
"Defense of the 100-yen barrier was weak this time around, so traders took advantage and zoomed ahead," said Sebastien Galy, currency strategist at Societe Generale in New York. "We see further upside in dollar/yen now that that barrier is gone," he said.
Option-related hedging is a large source of activity in the spot, or cash, currency market. When prices in the spot market trade in a relatively narrow price range, as dollar/yen has over the past month, demand for options tend to accumulate around the price range.
When that range was broken on Thursday, options investors were forced to come to the market and trade in the direction of the breakout, either to unwind hedges or to cover exposures created by the price break, or both.
The dollar rallied to 100.79 yen, its highest since April 2009. It last traded at 100.58 yen, up 1.6 percent on the day and its biggest one-day gain in a month, according to Reuters data.
The state of the U.S. jobs market is a key factor for the Federal Reserve. The central bank may opt to taper its $85 billion a month in bond purchases as unemployment falls towards its 6.5 percent target. Federal Reserve officials again debated the merits and timing of the central bank's bond buying program on Thursday.
The Bank of Japan, on the other hand, last month announced plans to buy $1.4 trillion in bonds to buoy its deflation-prone economy.
The euro, meanwhile, faltered against the U.S. dollar after two days of gains, pressured partly by a weaker-than-expected Spanish debt auction, which served as a reminder to investors that the outlook for the euro zone's weaker nations remained uncertain.
The euro fell to a session low of $1.3009, its lowest since April 26, failing to build on gains made after robust industrial data from Germany this week. It was last at $1.3038, down 0.9 percent on the day.
Against the yen, the euro last traded 0.7 percent higher at 131.14.
Spain's borrowing costs rose on Thursday to 4.19 percent on speculation the country was planning a syndicated deal in the near future, suggesting there would be a lot of supply in a short period of time.
Spanish yields have risen in four of the last five sessions. Market participants were unwilling to hold euros for a longer period given the threat of more monetary easing from the European Central Bank, a move that should further erode yields on bonds issued by euro zone sovereigns.
Bundesbank chief Jens Weidmann on Thursday said the ECB is still able to take policy action to address the euro zone crisis even after cutting its main interest rate last week, a German newspaper reported.
(Read More: Bundesbank's Weidmann Says ECB Still Has Room to Act)
This follows remarks from ECB policymakers Yves Mersch and Joerg Asmussen, who said on Wednesday the central bank still had room to maneuver on interest rates should the euro zone economy continue to weaken.
The ECB cut its main rate to 0.5 percent last Thursday. While German industrial data this week beat expectations, overall economic activity across most of the euro zone remains sluggish, keeping alive expectations the ECB may act again soon.