The yen climbed on Thursday to its highest level against the dollar since the Bank of Japan unleashed an aggressive stimulus plan in early April as a steep slide in Japanese stocks spurred an unwinding of bets against the yen.
The dollar pared losses versus the yen in early New York trading after U.S. data showed economic growth was intact, with U.S. retail sales rising more than expected in May and the number of Americans filing new claims for jobless benefits fell last week.
The Bank of Japan's announcement on April 4 that it would buy $1.4 trillion in bonds made it a one-way trade to buy Japanese equities and sell the yen.
The BOJ unnerved markets earlier this week by failing to announce new stimulative measures, fueling unease about whether central banks will continue the stimulus policies that world stock markets have come to rely on.
A steep slide in Japan's Nikkei and doubts over U.S. Federal Reserve stimulus and Japan's recovery led foreign investors to unwind hedges taken out to benefit from rising stocks and avoid being hurt by a weaker yen.
"This week's BOJ meeting, which offered no new policy initiatives or stimulus programs was the catalyst for the rapid change in sentiment in the foreign exchange market," said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management in New York.
The yen rose as high as 93.78 against the dollar, the strongest since April 4 after Japan's Nikkei share index closed down 6.4 percent. The dollar last traded at 95.36 yen, down 0.7 percent on the day.
Japanese equity futures, with which dollar/yen has been closely correlated in recent weeks, were also down around 2 percent, while European shares traded lower.
Given that the Nikkei has provided a lead on dollar/yen trading there is nothing to stop the bearish price action in the near term, according to BNP Paribas.
"We think this rout will eventually provide good opportunities to sell yen if you believe the power of policymakers in determining markets," the firm said.
Analysts said the yen, which rises in times of financial turmoil, was gaining on worries that the aggressive policies of Japanese Prime Minister Shinzo Abe were yet to boost the economy and stave off deflation.
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"The dollar squeeze in the last few days, despite stronger U.S. yields, has left a lot of market participants dazed and confused," said Alvin Tan, foreign exchange strategist at Societe Generale.
"The best explanation we can offer is that there is a broad squeeze in market positions, and we started this risk-off move with a market that was long dollars."
Strategists also said the yen has been supported as market participants shun risky assets on concerns the U.S. Federal Reserve might slow the pace of its asset purchase program.
Reflecting uncertainty about near-term direction, dollar/yen one-month implied volatility, a measure of expected price swings and a gauge of options pricing, jumped to its highest in more than two years.
In a bearish signal, the dollar fell below the base of its daily Ichimoku cloud, a closely watched chart indicator. A close below the cloud has not happened since mid-October, when the dollar traded around 78 yen.
"This is a fast market and 92.60 (in dollar/yen) is a possibility. But I expect we will see stabilizing action by the Japanese next week," said Hans Redeker, head of Global FX strategy at Morgan Stanley.
Market participants slashed hefty bets on gains in the dollar, which had been taken out on expectations the Fed would soon scale back monetary easing.
(Read More: What Japan Can Teach the Fed About QE Addiction)
The dollar lost 0.1 percent against a basket of currencies and was last at 80.66, not far from a nearly-four-month low of 80.50 hit earlier in the day.
The Australian dollar, meanwhile, was one of the best performers of the day, last trading up 1.8 percent at US$0.9651.
The euro hit a near four-month peak of $1.3390, but traders reported offers at $1.3400 and the euro trimmed gains to trade down 0.2 percent at $1.3304.
Against the yen, the euro was down 0.5 percent at 127.36 yen, having earlier fallen to 125.14, its lowest level since April 16, according to Reuters data.