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The dollar was sharply higher late morning on comments by Japanese officials suggesting the need for an inflation target as high as 2-3% and a sharply lower yen, dealers said.
They added that hedge funds are rebuilding the yen-short positions they had unwound ahead of the Thanksgiving break in the US and towards the year-end.
Finance Vice Minister for International Affairs Haruhiko Kuroda argued for the use of an inflation target by the Bank of Japan in an opinion piece co-written for the Financial Times with Deputy Vice Minister Masahiro Kawai.
"Inflation targets should therefore be set at a level that minimises the risk of deflation. For the European Central Bank, the target could be 2.0-3.0% a year. The BoJ's target should be higher," the story said.
Meanwhile, Finance Minister Masajuro Shiokawa said the yen is currently too high and the dollar should be around 150-160 yen, based on calculations of world value.
"Considering Japan's real, current strength, the yen appears too high," the Mainichi Shimbun quoted Shiokawa saying in a lecture yesterday.
However, investors remained relatively sceptical about Shiokawa's comments, given the minister's previous eratic statements.
"I don't take it on face value. If it was Kuroda, it would indicate a drastic change in policy," said Minori Takeuchi, foreign-exchange analyst at JP Morgan Chase.
"I guess it's one of the factors that pushed the dollar above the key technical level of 123.20 yen," Takeuchi said.
"The other thing is Kuroda's comment in the FT. He wants to set an inflation target of 2-3% and (BoJ governor Masaru) Hayami will retire in March," she said. Hayami is a strong opponent of setting an inflation target.
Investors noted the dollar is also benefiting from technical factors related to the Thanksgiving holiday in the US last week and the drawing to a close of the financial year there.
"New York-based hedge funds are behind the weakness of the yen as they took profits in dollar/yen ahead of the closing of their year-end," Kosuke Hanao, head of forex sales, Royal Bank of Scotland.
"Now they are again building up short positions on the yen as US equities look to remain stable," he said.
Hanao said he expects the dollar to range around 122 to 124 yen this week, with the euro likely to trade between 121.50 and 123.00 yen. The euro is seen steady between 0.9900 and parity to the dollar.
Tokyo 11.20 am Sydney 9.45 am New York 12.21 pm Friday
Dollar
yen 123.32 up from 122.61 122.55
sfr 1.4874 up from 1.4837 1.4841
Euro
usd 0.9923 down from 0.9947 0.9942
stg 0.6375 down from 0.6385 0.6390
yen 122.37 up from 121.95 121.84
sfr 1.4759 down from 1.4758 1.4755
Sterling
usd 1.5564 down from 1.5578 1.5559
yen 191.93 up from 190.81 190.68
sfr 2.3149 up from 2.3077 2.3091
Australian dollar
usd 0.5595 down from 0.5612 0.5610
stg 0.3594 down from 0.3604 0.3606
yen 68.99 up from 68.81 68.75
© AFX News