The yen hovered near an all-time high against the dollar, recovering from a brief, sharp fall as investors continued to buy the safe-haven currency even as speculation grows that Japanese authority may step at any time to stem its strength.
Traders also attributed the yen's latest rise to a record high yuan fix which strengthened other Asian currencies used as a proxy for the Chinese currency.
A steady retreat in European shares from early gains prompted investors to dump risky currencies, including the euro, while system-related selling accelerated the single currency's losses, pushing it near the day's low.
"The risk is clearly still that we could see this crisis continue to destabilise the euro," said Lee Hardman, currency strategist at BTM UFJ.
"We think there's an increasing risk of recession not just in the periphery but spreading through to the core."
The euro was flat on the day at $1.4180, pulling back from a session high of $1.4275 according to electronic trading platform EBS. A break of $1.4230 triggered selling by system-related funds which accelerated its move, taking it near the day's trough of $1.4122.
The dollar last traded down 0.4 percent on the day at 76.60 yen. In earlier trade, the dollar jumped to above 77 yen from 76.30 yen, prompting speculation that Tokyo was selling yen to try to weaken the currency.
It hovered near its all-time low of 76.25. Analysts said the current uncertainty in global financial markets meant the yen would continue to be well bid.
"We got almost to the previous (dollar) low and the market is much more jumpy at these extreme levels," said Kit Juckes, currency strategist at Societe Generale.
"Without intervention the yen will appreciate further. Gravity will pull dollar/yen down as long as US Treasury yields are so low, and China is a huge trading partner of Japan so yuan strength helps the Japanese currency."
The Japanese currency has also been boosted in recent weeks as investors seek shelter from the euro zone debt crisis and concerns about the US economy.
A Ministry of Finance official declined to comment whether Japanese authorities intervened, while Japanese Prime Minister Naoto Kan said moves in the foreign exchange market were one-sided and the government would continue to monitor moves and respond appropriately.
Traders cited option barriers around 76.25 yen, with large option expiries at 76.00 yen later on Thursday.
Front-dated dollar/yen implied vols also rose on Thursday as market players became more nervous about the prospect of intervention, with one-week vols rising to around 18.25 percent from 16.80 on Wednesday.
Commodity currencies such as the Australian and New Zealand dollars benefited from speculation China may widen the band within which the yuan can trade against the US dollar. The Aussie climbed to US$1.0217, up 0.3 percent on the day. The kiwi rose 0.6 percent to US$0.8168.
Safe haven currency the Swiss franc weakened on market chatter that Swiss National Bank could be considering imposing negative interest rates.
The euro rose 1.8 percent to 1.0485 francs, off a record low of 1.0075 hit on Tuesday. Selling versus the dollar pulled the euro away from a session high of 1.0553 francs.
The dollar climbed 1.5 percent to 0.7375 francs but analysts said moves would be difficult to sustain.
"Comments from the SNB suggests they are at a point where they are considering more unconventional and aggressive measures to dampen the Swiss franc which has reached extreme levels of over-valuation and is a threat to the Swiss economy," BTM's Hardman said.
Copyright Reuters, 2011