The yen surged to a fresh two-month high against the dollar in Asia on Thursday as regional stocks fell, with the Tokyo market entering into a bear market.
The Nikkei Stock Average and the yen were trapped in a vicious cycle, and there is no indication of when it will end, said Atsushi Hirano, head of foreign exchange sales at Royal Bank of Scotland RBS.LN -6.02% in Tokyo.
"The Nikkei falls because the dollar/yen falls, then the dollar/yen falls further because the Nikkei has fallen."
The yen rose as investors moved out of riskier assets as speculation grows that the U.S. Federal Reserve will soon scale back its monetary stimulus.
"It's broad risk aversion that's strengthening the yen and weighing on share prices," said Kengo Suzuki, foreign-exchange strategist at Mizuho Securities in Tokyo. "Volatility could persist unless the Fed calms markets by clarifying its stance" at its June 18-19 policy meeting.
The dollar hit a two-month low of ¥93.90 from ¥96.08 late Wednesday in New York. The greenback was at ¥94.10 as of 0610 GMT. The euro was at ¥125.80 from ¥127.95.
The Nikkei ended down 6.4% falling more than 20% from the May 22 close, meeting the definition of bear market.
Other Asian markets fell broadly. As the Philippine stock market dropped further on continued foreign selling, the dollar rebounded to 43.32 pesos from an earlier low of 43.10 pesos.
Despite Bank Indonesia's surprise rate hike Wednesday to stop capital outflows, the dollar was higher at 9,880 rupiah compared with 9,850 rupiah late Wednesday in Jakarta as investors continued to pull their money out of emerging markets.
Earlier in the day, South Korea's central bank kept its benchmark interest rate steady at 2.50% as widely expected. New Zealand's central bank kept interest rates on hold and indicated it would do so through the end of the year.
The yen has fallen significantly over the past few months following the economy-boosting policies of Prime Minister Shinzo Abe, and the monetary easing program of the Bank of Japan 8301.JA -5.09% .
But it strengthened after comments by Fed chairman Ben Bernanke last month were widely understood as hinting at the Fed scaling back its own easing program in coming months.
"If these falls continue, we could see both the dollar/yen and the Nikkei back to levels before the BOJ revealed its easing program in April," said a senior trader at a major Japanese bank. Before the BOJ's April announcement, the dollar was ¥92.73 and the Nikkei was at around 12,150.
Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo, said the dollar could fall as far as ¥92.
Earlier in the year, interbank participants sold options contracts that benefit holders if the dollar falls against the yen. "As the yen strengthens, their positions are increasingly troubling them," said Akira Moroga, manager at Forex Products Group at Aozora Bank 8304.TO -2.47% .
The Wall Street Journal Dollar Index, which tracks the dollar against a basket of currencies, was at 72.466 compared with 72.918. The euro was at $1.3373 from $1.3338.
The U.K. pound was at $1.5687 from $1.5677. The dollar was at 0.9151 Swiss francs from 0.9206 francs.
