NEW YORK The yen dropped to a 31-month low against the U.S. dollar on Friday, sliding for a 10th straight week, on expectations of aggressive monetary policy action from the Bank of Japan.
Investors, however, opted to book profits in the euro versus the yen, although the currency shared by 17 counties was 0.6 percent higher this week and 4.8 percent stronger so far in 2013. The euro also fell against the dollar after steep gains the previous session.
The dollar has gained 3.8 percent against the yen this year and most strategists believe the U.S. currency is poised to continue appreciating if the BoJ early next week takes steps - beyond market expectations - to halt a deflationary spiral.
"Expectations are nearly universal for a shift from a 1 percent to a 2 percent inflation target, including upsized (asset buying) measures," said Dan Dorrow, head of research at FX broker Faros Trading in Stamford, Connecticut.
"Prime Minister (Shinzo) Abe and the political class as a whole have a very compelling need to push BoJ into a regime change and keep it there. The political pressure on the BoJ will not abate."
Sources familiar with the BoJ's thinking told Reuters the central bank will consider making an open-ended commitment to buy assets until the 2 percent inflation target is reached.
Such a plan would exceed market expectations, analysts said.
The dollar hit a peak of 90.18 yen, its highest since June 2010. It last traded up 0.2 percent at 90.08 yen. On the week, the dollar was up 0.9 percent against the yen.
Intraday bias stayed on the upside, analysts at ActionForex.com said, with the current rally seen extending to the 94.98 resistance level.
On the downside, a break of the 87.77 yen support, the low struck on Wednesday, is needed to signal a short-term top. A reported options barrier at 90.75 yen could also act as near-term resistance.
Traders reported strong demand for options betting on further yen weakness, with one-month dollar/yen implied volatility - a measure of expected price movement - rising to its highest since August 2011.
One-month risk reversals showed demand to buy yen puts, or bets on the yen falling, also rose.
Kathy Lien, managing director at BK Asset Management in the New York, thinks the BoJ could disappoint investors next week, which could lead to a rebound in the yen.
"A shift to a 2 percent inflation target is already discounted by the market and we fully expect the BoJ to acquiesce, but what the market wants to see is an action plan and we're not sure if the BoJ governor will go that far when there are only three months left in his term," said Lien.
CHINA DATA WEIGHS ON RISK ASSETS
Concerns about global growth weighed on risk appetite after China reported slowing growth in 2012. Currencies correlated to global growth, such as the Australian and Canadian dollars, fell on the data.
The Australian dollar slid 0.4 percent vs. the greenback to US$1.0507. The Canadian dollar also fell, pushing the U.S. currency up 0.6 percent to C$0.9915.
The safe-haven dollar could further gain against riskier currencies such as the Aussie dollar over the next month, as U.S. politicians debate how to raise the country's borrowing limit, or debt ceiling.
Worries about the debt ceiling weighed on a U.S. consumer confidence index for January, which on Friday showed a decline for a second straight month, to its lowest level in more than a year.
Riskier assets got a reprieve in the afternoon. U.S. House Republican leaders said they would seek to pass a three-month extension of federal borrowing authority next week to give the Senate time to pass a budget plan that reduces the country's fiscal deficit.
The euro zone's economic backdrop, meanwhile, remained dismal and should data out of the region continue to show weakness, the European Central Bank may opt to cut rates in the coming months, a negative for the euro.
The euro last traded 0.2 percent lower against the yen at 119.95 yen, down from 120.70 hit earlier - its highest since May 2011.
The euro earlier climbed to a 20-month high against the Swiss franc of 1.2568 francs, with analysts expecting the Swiss currency to remain weak. It last changed hands at 1.2443 francs, down 0.2 percent.
Against the dollar, the euro retreated from $1.3401, just shy of an 11-month high of $1.3403 set on Monday. It last traded at $1.3316, down 0.4 percent. On the week, the euro slipped 0.3 percent against the greenback.
(Additional reporting by Julie Haviv; Editing by Leslie Gevirtz)