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Dollar extends rally after Fed, yen held back by BoJ

Sha Ying | CNBC

The dollar hit a five-year high versus the yen on Friday as markets focused on the divergence between U.S. and Japanese monetary policy, driving U.S. Treasury yields higher after Wednesday's Fed decision to start cutting bond-buying.

(Read more: The dollar bulls are back with a bang)

The greenback also gained against the euro, which was held back by S&P's decision to cut the European Union's supranational long-term rating to AA-plus from AAA, citing rising tensions on budget negotiations.

The dollar, which looks set to be backed by relatively higher interest rates next year if the Federal Reserve gradually calls a halt to bond-buying, rose to 104.60 yen on the EBS trading platform, its highest since October 2008, and was recently at 104.45 yen, up 0.2 percent.

(Read more: Buy Japan exporters on weak yen? Not so fast)

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In contrast to the Fed, the Bank of Japan reaffirmed overnight it would keep monetary policy loose and dollar bulls are now targeting a level around 105.25 yen, a 61.8 percent retracement of the dollar's fall from its 2007 high of 124.14 yen to its 2011 low of 75.31 yen.

The euro, which has surprised many analysts and hedge fund managers by moving higher against the dollar since the summer, was down 0.1 percent against the dollar at $1.3632.

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