LONDON (Reuters) - The dollar rose to a fresh 2 1/2-year high against the yen on Friday after Japanese Prime Minister Shinzo Abe said the Bank of Japan should consider adding employment to its existing mandate of price stability.
Traders said further losses were in store for the struggling yen, after the dollar broke a 30-year resistance line of 89.30 yen to hit a high as 89.35 yen, its strongest since June 2010.
The dollar last traded at 88.98 yen, up 0.2 percent on the day, with options barriers cited at 89.50 yen. A breach of the barriers could propel the dollar higher.
"The pace of increase not just (in dollar/yen) but also the pace of policy reforms in Japan is exceeding market expectations," said Ian Stannard, head of European FX strategy at Morgan Stanley.
"As a result we have raised our forecast even further... looking for dollar/yen to move towards the 95 level by the end of this quarter."
Abe's comments on Friday put renewed pressure on the yen, as having a dual mandate similar to the U.S. Federal Reserve's, could see the BOJ undertake more aggressive monetary easing.
The euro climbed to 118.58 yen, its highest since May 2011, and last stood at 118.02 yen, up 0.2 percent on the day. The euro had risen broadly after European Central Bank President Mario Draghi on Thursday gave no indication of near-term cuts in interest rates.
Data showing Japan's first current account deficit in ten months, of 222.4 billion yen ($2.5 billion) in November, far larger than the forecast of a 3.5 billion yen ($39 million) deficit, [ID:nT9E8LC00Z] also put pressure on the yen.
"Short-term players who had earlier taken profits are now re-entering. A rise above 90 is within sight now," said a trader at a Japanese bank.
The yen has been sinking since November on speculation the BOJ could ease policy further. Analysts expect the BOJ to adopt an explicit 2 percent inflation target at its policy meeting on January 21-22 to fall in line with the aims of the government.
"We expect this move up (in dollar/yen) to be sustained and to maintain this current momentum. The pullbacks in dollar/yen have been very shallow and this underlines the strength of this trend," Morgan Stanley's Stannard said.
Draghi's comments pushed the euro up 1.6 percent on Thursday, its biggest daily gain in five months and to a one-week high against the dollar.
While the euro was down 0.1 percent on the day against the dollar on Friday at $1.3263 it was not far from an 8 1/2-month peak of $1.33085 hit last month.
BNP Paribas analysts said in a note that euro/dollar was "far from overvalued even after yesterday's bounce" and said a test of resistance at $1.3325 was "on the cards".
The euro's ascent helped it to a four-month high against the Swiss franc of 1.2175 francs.
Solid demand at a sale of Spanish debt on Thursday also bolstered the euro and the market will closely watch an Italian bond auction on Friday.
The Australian dollar was at $1.0566, near $1.0599 touched on Thursday which was its highest since mid-September.
Morgan Stanley's Stannard said if the Aussie moved above the $1.06 area, it could "certainly open the way for a move up towards the $1.10 area, which is our forecast for the first half of the year." He however warned that weak economic fundamentals in Australia could weigh on the Aussie in the second half of 2013.
(Additional reporting by Hideyuki Sano, Jessica Mortimer, editing by Nigel Stephenson)
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