TOKYO The dollar rose to its highest level against the yen in nearly 2 1/2 years on Friday, while the euro also firmed against the yen on expectations that this year will bring more monetary stimulus by the Bank of Japan.
But the euro slipped against the greenback, touching a new three-week low after minutes from the U.S. Federal Reserve's last meeting indicated that while the Fed looks set to continue buying bonds, some policymakers are reticent about further increasing its $2.9 trillion balance sheet.
The dollar added 0.4 percent to 87.63 yen after earlier rising as high as 87.660 yen on trading platform EBS, its highest level against the Japanese currency since July 2010.
Tokyo markets reopened on Friday for the first day of trading after the long Japanese New Year's holiday, with the dollar having gained 12.8 percent against the yen in 2012 in its biggest yearly percentage rise since 2005. Investors are betting that the new government of Prime Minister Shinzo Abe will push to weaken Japan's currency and implement aggressive stimulus, and lean on the Bank of Japan to do the same.
"The yen's negatives are increasingly prominent - economic deterioration, external weakness, geo-political conflict with major trading partners, physical and human capital outflow, and increasing pressure on the BOJ," Steven Englander, head of global G10 currency strategy for Citigroup, said in a research note.
Moreover, he said, the run-up in US equities has pulled the spread between benchmark 10-year U.S. Treasuries and 10-year Japanese government bonds to their widest since early April, which also lends support to the dollar over the yen.
Later on Friday, the U.S. nonfarm payrolls report is expected to show the economy added 150,000 jobs in December, according to a Reuters survey of economists, up from November's 146,000. The U.S. unemployment rate is expected to stay at 7.7 percent.
The euro gained on the yen, up about 0.4 percent to 114.26 yen after rising as high as 114.27 yen, but it was still far below an 18-month high of 115.995 yen set on trading platform EBS on Wednesday.
The euro is on track to end the week below its 200-week moving average, now at 114.89, which could signal a pullback toward 111.45 yen, which was its March 2012 high.
Against the dollar, the euro slipped about 0.1 percent to $1.3042, after falling as low as $1.3023 on EBS, its lowest since December 12.
While the U.S. central bank looks set to continue buying bonds, the latest Fed minutes revealed that some policymakers believe it will be appropriate to "slow or stop asset buys well before the end of 2013."
The euro had jumped on Wednesday, after U.S. lawmakers reached a deal to avoid the "fiscal cliff" of tax hikes and spending cuts that economists had feared would tip the U.S. economy back into recession.
(Additional reporting by Reuters FX analyst Krishna Kumar in Sydney)