The dollar rose to near a four-year high against the yen on the entrenched expectation that Japan's wide interest rate gap with the rest of the world is unlikely to narrow any time soon.
The Bank of Japan left official rates at just 0.25% last week. Those low rates have made the yen a choice for carry trades, where investors use low-yielding currencies to purchase others with a higher return.
"The carry trade got back in full force after the Bank of Japan's decision last week," said Thierry Elias, head currency trader at Banque Natexis Populaires in New York. "The yen is suffering."
At the same time, demand for the dollar rose since an upbeat U.S. consumer sentiment report on Friday capped a week of strong economic data that reinforced the outlook for the Federal Reserve to hold interest rates steady at 5.25% in the months ahead, rather than cut them.
Data showed speculators on the International Monetary Market racked up a net yen short position of 138,146 contracts by Tuesday, a record high, but analysts said extreme positioning would not stop the yen from weakening further.
"The risk now is that we might be getting over-extended on the carry trade," said Brian Taylor, managing director of foreign exchange trading with M&T Bank in Buffalo, New York.
In mid-morning trading in New York, the dollar was up near levels last seen in March 2003. Traders said the dollar's gains were accentuated by the taking out of stop-loss levels around 121.50 yen.
The yen fell versus other high-yielding currencies, falling to a near-decade low versus the Australian dollar, an 8-1/2-year trough against the pound and a year low versus the New Zealand dollar.
"There's been some interesting movement on those currency crosses since the start of the year," said M&T Bank's Taylor. "The focus is not only on dollar-yen, euro-yen."
The euro also firmed against the Japanese currency, nudging towards a record high around 158 yen struck this month. It also ticked up towards recent eight-year peaks versus the low-yielding Swiss franc.
A report on U.S. leading indicators for December, originally planned for 10 a.m., was postponed to Tuesday, the Conference Board said.
San Francisco Federal Reserve Bank President Janet Yellen said on Monday that U.S. interest rates were high enough to cut inflation, but that risks have arisen from the robust labor market.
"Let me be clear that I do want inflation to move down, but I believe policy may now be well-positioned to foster exactly such an outcome while also giving due consideration to the risks to economic activity," Yellen said in a speech to the Joint Rotary Clubs of Reno and the East Bay.