The yen hung near a 4-1/2-year low versus the dollar on Thursday, weighed down as investors continued to use the currency to buy higher-yielding units such as the New Zealand dollar in carry trades.
The kiwi struck a 22-year peak of $0.7660 as market players brushed aside the Reserve Bank of New Zealand's attempts to stem the currency's strength in the past two weeks and chased its steep short-term yield of 8 percent.
The market is testing the central bank's will to step in and stem the currency's rise, traders said. Although intervention fears may slow the pace of the kiwi's ascent, the country's high interest rates are expected to keep it strengthening.
"In the medium-term, I think even the RBNZ's willingness to intervene won't have a lot of impact on the kiwi," said a head trader at a North American bank in Tokyo. "They should know the reason people are buying the kiwi is for the interest rates, not for fruit or sheep."
The yen drifted away from a record low against the euro but traders said it was only a matter of time before the single currency scaled a new high against the Japanese currency. "The basic trend of currencies with prospects of rising interest rates strengthening remains intact," said Nobuo Ibaraki, a forex manager at Nomura Trust and Banking.
The dollar was up 0.2 percent from late US trade at 123.65 yen and just off a peak of 123.76 yen struck earlier in the week on electronic trading platform EBS, the highest since December 2002.
The euro was little changed at 165.60 yen moving away from the all-time high of 166.12 yen hit on EBS earlier in the week. The single European currency inched down 0.1 percent to $1.3392. The New Zealand dollar pulled off its latest peak since the currency was allowed to trade freely in 1985 to stand at $0.7644 up 0.8 percent on the day. The kiwi hit a 20-year high versus the yen near 94.70 yen.
The Bank of Japan is expected to boost interest rates as early as August, but much higher interest rates in other countries is feeding carry trades and Japanese investor appetite for higher-yielding foreign assets. Japan's overnight rates at 0.5 percent remain the lowest of industrialised countries. "The yen's weakening trend will likely continue as there appears to be no clear bottom," Ibaraki said.