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NEW YORK (Reuters) - The Japanese yen plunged to its lowest level against the U.S. dollar in more than four years on Friday after data confirmed Japanese investors were purchasing more foreign assets, with more losses seen likely as the Bank of Japan's massive monetary easing takes hold.
The dollar, on the other hand, rallied broadly as recent strong U.S. data in the labor market - last Friday's robust nonfarm payrolls report and Thursday's weekly jobless claims data - sparked talk the Federal Reserve may scale back its asset purchases.
With the Japanese currency on Thursday breaching the psychological and technical level of 100 to the dollar, most analysts expect the yen to continue to weaken as the Bank of Japan embarks on its $1.4 trillion bond buying plan.
Some have called for the dollar to rise to 105 yen this summer and 110 by the end of the year. While BoJ policy has weighed on the yen, its weakness against the dollar is just as much a result of an improving U.S. economic landscape.
"In some ways, there has been too much focus on the yen here and while breaking into triple digit territory is always exciting, the strong U.S. payrolls and jobless claims data in recent weeks shows that the United States is very much back in play," said Steven Englander, head of G10 strategy at CitiFX, a division of Citigroup in New York.
"People had been flirting with the idea that Europe's growth picture was getting better and Japan was improving, but the reality is that the U.S. is the only game in town and what we are seeing in the yen is a manifestation of that," he said.
The Japanese currency fell to 101.98 yen per U.S. dollar, the lowest since October 2008. The dollar last traded at 101.58 yen, up 1 percent on the day.
Traders said the yen extended falls after breaking through a reported options barrier at 101.50 yen and as stop-loss dollar buy orders were triggered above 101.55 and 101.60 yen. Another options barrier was said to lurk at 102.00 yen.
Hedging currencies in the option market is one of the biggest sources of activity in the spot, or cash, market. Sizeable option-related demand often is forced to come into the market and trade in the direction of the breakout in price, either to unwind hedges or to cover new exposures, or both.
"The break of the 100-yen level unleashed the animal spirits," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.
Overnight, data showed that Japanese investors turned net buyers of foreign bonds in the last two weeks. They bought 309.9 billion yen ($3.1 billion) in foreign bonds in the week through May 4 after purchasing 204.4 billion yen ($2 billion) the previous week, according to the Ministry of Finance. <JP/CAP>
"With yields nonexistent in Japan, investors are forced to search for yield elsewhere, driving down the value of the yen while boosting currencies with highly-rated sovereigns like the U.S. Dollar," said Christopher Vecchio, currency analyst at DailyFX in New York. "With the new trend developing, the next leg of Japanese yen weakness has begun."
The yen has lost nearly 9 percent against the U.S. currency since the BoJ announced aggressive monetary easing on April 4, and was down over 17 percent so far this year.
Analysts at UBS were also optimistic, raising their one- and three-month forecasts to 102 and 105 yen respectively, both from 95 yen previously.
Other analysts, however, were more cautious, believing that after hitting lofty levels in dollar/yen, gains in the greenback could slow.
"The burst of activity could be reasonably temporary," said Nick Bennenbroek, managing director and head of currency strategy at Wells Fargo in New York, citing an extremely short speculative positioning in the yen.
"We would need fresh central bank signals to spur another leg higher - a hawkish Fed and a dovish BoJ. I don't think those signals are forthcoming anytime soon."
The focus now shifts to the G7 meeting in the United Kingdom on Friday and Saturday, where currencies - especially the yen's weakness - could be up for discussion. And it could be a contentious debate. Even before the break of the 100-yen level, the U.S. government had been closely monitoring Japan's efforts to reflate its economy.
Reflation is in the early stages, but the yen has already dropped nearly 32 percent against the dollar since autumn last year.
On Friday, U.S. Treasury Secretary Jack Lew said Japan had "growth issues" that needed to be dealt with but that its attempts to stimulate its economy needed to stay within the bounds of international agreements to avoid competitive devaluations.
The euro, meanwhile, hit a three-year high of 132.25 yen and was last at 131.82, up 0.5 percent. But it was down 0.5 percent against the dollar to $1.2979 after hitting a one-month low of $1.2935, according to Reuters data.
Some $4.8 billion in yen changes hands, using Reuters Dealing data, while $4.2 billion in euros changed hands.
The dollar gained 2.6 percent against the yen this week but that is only the best week since April 5. The euro fell 1 percent against the dollar this week, the worst since the week of March 29.
Reporting By Nick Olivari, Gertrude Chavez-Dreyfuss and Julie Haviv; Editing by Chris Reese