* Dollar/yen hits highest since Aug 2010
* Euro/yen touches 17-month high, nears 200-week MA
* Dollar seen in 80-90 yen range in 2013 - JPMorgan
By Lisa Twaronite and Masayuki Kitano
TOKYO/SINGAPORE, Dec 28 The yen fell to its lowest level in more than two years versus the dollar on Friday, pressured by expectations that the new Japanese government will push the Bank of Japan into more aggressive monetary easing.
The dollar's rise against the yen gained further momentum due to stop-loss buying, which helped lift the greenback to 86.64 yen, its strongest level versus the Japanese currency since August 2010.
"There were a bunch of stops related to option barriers," said a trader for a Japanese bank in Singapore, referring to the stop-loss dollar bids that were triggered earlier on Friday.
After trimming some of its gains, the dollar last traded at 86.44 yen, up 0.4 percent from late U.S. trade on Thursday.
The yen also fell against the euro, touching its lowest level in about 17 months. The euro soared to 114.675 yen on trading platform EBS, its strongest level against the yen since July 2011.
The euro last changed hands at 114.49 yen for a gain of 0.5 percent on the day, with a test of its 200-week moving average at about 115.00 yen in sight.
The yen hit a two-year low versus the dollar for the third straight day, having come under renewed pressure after Shinzo Abe took the helm as Japan's prime minister on Wednesday.
Abe has vowed to push through aggressive monetary stimulus to fight deflation. One of Abe's key advisers told Reuters in an interview on Thursday that the Bank of Japan needed to set a higher inflation target, and the government needed to make the central bank more accountable for its policy objectives.
The dollar is all but certain to end the week above its 200-week moving average, now at roughly 84.95 yen, for the first time since the week ending Dec. 23, 2007, a technical signal portending further gains.
"A lot of people are looking for 90 as a reasonable target," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York.
"The only way we're going to get there is through a sea change in policy, and this one has some real momentum behind it," Wilkinson said.
WEAK YEN TREND
The yen has fallen more than 12 percent against the dollar in 2012, putting it on track for its biggest annual percentage drop since 2005.
Analysts at JPMorgan are among those who expect the dollar to head towards 90 yen.
In a research note on Friday, they revised their forecast for the dollar's range in 2013 to between 80 yen to 90 yen, from 75 yen to 85 yen previously. Their end-2013 forecast for the dollar was revised to 87 yen, up from 79 yen.
JPMorgan's analysts said the weak yen trend was likely to continue until Japan's upper house elections in July, adding that they had underestimated the impact of Japan's trade deficit on the yen as well as the extent to which overseas investors' perception of Japanese politics and policies had changed.
"Put simply, what we overlooked was the strength of the market's hunch that 'this time is different' and the rising hope that Japan's economy and politics were headed towards real change this time around," the JPMorgan analysts wrote.
"Indeed, the Abe administration has strong incentive to keep the market hoping for more until the Upper House elections in July," they said.
In addition, the recent fall in the yen and rally in Japan's benchmark Nikkei share average could stimulate Japanese investors' risk appetite and encourage self-sustaining capital outflows, they added.
The euro edged up 0.1 percent to $1.3245, with investors waiting to see whether a last-chance round of U.S. budget talks would achieve a deal to avoid the "fiscal cliff".
U.S. President Barack Obama and Vice President Joe Biden will meet congressional leaders from both parties at the White House on Friday to try to revive negotiations to avoid tax hikes and spending cuts -- together worth $600 billion -- that will begin to take effect on Jan. 1.
Market players have said that the dollar could benefit from safe-haven buying if no deal is reached by year-end.