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Dollar/yen hits 5-year high as taper talk builds

US one dollar bill showing the portrait of first US President, George Washington.
Jon Boyes | Photographer's Choice RF| Getty Images
US one dollar bill showing the portrait of first US President, George Washington.

The U.S. dollar hit a five-year high against the yen on Friday amid talk that the Federal Reserve could start unwinding its monetary stimulus as soon as next week's policy meeting.

The dollar rose as high as 103.92 yen, taking its gains over the past month to about 4.6 percent. It also rose to its highest level against the Australian dollar in more than three months at about 0.8910.

(Read more: Get ready, here it comes: A December taper)

"The move in dollar/yen has certainly entered levels that are interesting," said Emma Lawson, a senior currency strategist at National Australia Bank. "Most people have moved towards expectations for a December or January taper and the yen is standing out as the currency to short."

Stronger-than-expected economic data in the past week has fueled speculation that the Fed could start scaling back its $85 billion-a-month asset purchase program sooner rather than later, putting the spotlight on next week's monetary policy meeting.

(Read more: Traders fear Fed uncertainty more than Friday 13th)

Data on Thursday showed that U.S. retail sales rose 0.7 percent in November from a month earlier, compared with market expectations for a 0.6 percent rise. Last Friday, the closely watched non-farm payrolls report showed the U.S. economy created a higher-than-expected 203,000 new jobs last month.

"The dollar is broadly higher and I guess the Fed meeting next week has a lot to do with this," said Nizam Idris, managing director and head of strategy, fixed income and currencies at Macquarie Bank.

"The budget deal is also signed, so that's another hurdle out of the way," he added, referring to news late Thursday that the U.S. House of Representatives passed a two-year budget plan that would end some automatic spending cuts.

The prospect of another stalemate on budget talks had been seen by analysts as one reason why the Fed may push back the start of tapering its stimulus program.

Both Idris and Lawson said Friday's move in dollar/yen puts the currency pair on track for a move to the 105 level, possibly before year-end.

(Read more: Dollar/yen to extend rally)

"The move in dollar/yen today is reflective of the market pricing in Fed tapering next week," said Idris.

Kelly Teoh, a market strategist at trading firm IG, added: "The immediate level we are watching is 104. The dollar strength is going to continue and be exaggerated ahead of the FOMC meeting."

Japan's currency is now down some 20 percent against the U.S. dollar this year, giving Japanese exporters a competitive edge. The yen also slipped to a fresh five-year low at around 142.82 to the euro.

And a fresh bout of yen weakness helped boost Japan's blue-chip Nikkei stock index Friday.

— By CNBC.Com's Dhara Ranasinghe; Follow her on Twitter

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