A day after the U.S. dollar suffered its largest one-day fall in three years against the yen, strategists say the wild currency moves may be far from over and much is dependent on Friday's key U.S. jobs report.
Japan's yen, which has gone from steep decline to sharp gains in a matter of weeks, hit its highest level in almost two months against the dollar on Thursday. The euro jumped more than 1 percent against the greenback and the battered Australian dollar won a reprieve, bouncing off Thursday's 20-month low.
Analysts say it's hard to pin point exactly what triggered the overnight dollar drubbing, although investors used the opportunity to pull-back on long dollar and short yen positions with some nervousness about the closely-anticipated U.S. payrolls report encouraging the dollar bears.
(Read More: Dollar Still in Firing Line Ahead of US Jobs Report)
"The sell-off in the dollar suggests that some traders may have already priced in a weaker release, but we think there is still room for a downside surprise and further dollar weakness," said Kathy Lien, a managing director at BK Asset Management in a note.
"However if payrolls surprise to the upside and print at 175,000 or better, all of the liquidation of dollar long positions that we saw [Thursday], particularly in dollar/yen could be reversed quickly and aggressively, with the pair potentially trading back to 98 in a blink of an eye," she said.
Economists expect the U.S. economy created about 170,000 new jobs in May versus 165,000 in April and the data are seen key to shaping market expectations on an unwinding of U.S. monetary stimulus.
(Read More: Why May Jobs Report Could Be Watershed for Markets)
The dollar was trading at around 96.80 yen in early Asia trade on Friday, having fallen as far as 95.96 overnight – some 7.5 percent below a four-and-a-half year high hit just over two weeks ago.
"In a nutshell, what happened in the forex markets is that the dollar got very over extended. If you look at the IMM [market positioning] data from a few weeks ago, we were at the longest long-dollar position since 2008 and I'm not sure that was entirely justified by fundamentals," Vassili Serbriakov, currency strategist at BNP Paribas in New York told CNBC Asia's "Squawk Box."
"Certainly a longer-term bullish view on the U.S. economy makes sense but I think the market just got ahead of itself," he added.
Yen Surge Not Just About the Dollar
The yen surge dealt a blow to Japanese stocks, which extended recent declines into bear territory with the Nikkei down more than 20 percent from a five-and-a-half year peak set in May.
Japanese policymakers, who have been betting on yen weakness to help revive a frail economy, meanwhile jumped in to express their views on the shock overnight currency moves.
Japan's Finance Minister Taro Aso was reported saying on Friday that he was watching foreign exchange markets although currency moves were not at a stage where he would consider intervention.
Analysts said the move in dollar/yen was not just related to broad weakness in the U.S. currency, but also from some disappointment that the growth plan unveiled by Japanese Prime Minister Shinzo Abe this week did not go far enough to tackle the long-term problems facing Japan's economy.
(Read More: Japan Fires 'Third Arrow,' but Will It Work?)
"The fall in dollar/yen is a follow on from disappointment with Abe's 'third arrow' [on structural changes] and heading into the payrolls data, there was a closing out of positions," said Greg Gibbs, currency strategist at Royal Bank of Scotland.
Analysts expect dollar/yen to stabilize around 96, adding that further volatility was possible.
"On a day that you have a 3 percent move, anything looks possible but you have to be careful and we wouldn't be looking for a quick snap back in dollar/yen," said Serbriakov at BNP Paribas. "What complicates things for the yen is the volatility in the Nikkei and bonds but the direction is still down."
— By CNBC.Com's Dhara Ranasinghe, Follow her on Twitter: @DharaCNBC