The yen hovered near a 2 1/2-year low against the dollar and a record trough versus the euro on Friday after a rise in euro zone interest rates highlighted the drag on the Japanese currency from near-zero rates in Japan.
The European Central Bank raised the key rate to 2.25 percent as expected on Thursday, triggering the euro's rise to an all-time high against the yen, though a tepid outlook for future tightening prompted selling versus the dollar.
ECB President Jean-Claude Trichet made clear the bank was in no rush to raise rates again, suggesting the dollar would keep its yield advantage in the near term.
The US fed funds rate is at 4 percent and widely expected to climb to 4.5 percent by early next year, while rates in Japan have been locked near zero for nearly five years.
The dollar has capitalised on its yield advantage all year, climbing 18 percent against the yen and around 16 percent versus the euro. Meanwhile, the single currency has appreciated around 8 percent against the yen since early June.
The yen has suffered in particular because market participants do not see Japanese rates rising until at least the second half of next year, despite growing expectations the Bank of Japan will end its easy-money policy by mid-2006.
BoJ Deputy Governor Toshiro Muto said on Friday the chances of a change in policy would increase from April but the central bank could take its time before implementing a further policy shift after that, reiterating earlier remarks by BoJ officials. The dollar was fetching around 120.55 yen. That was down slightly from the level in late US trade on Thursday, when the dollar powered through the psychological 120-yen level to 120.73 yen, its highest since April 2003.
While the dollar's uptrend was seen intact, traders said the currency having cleared 120 yen had prompted some dealers to lock in profits and take a break for now.
The euro was buying $1.1725, licking its wounds after sliding to $1.1690 following the ECB decision. It hit a two-year low around $1.1640 last month.
The single currency was at 141.35 yen after climbing to around 141.65 yen on Thursday, its highest level since the euro was introduced in 1999.