The yen hit a record low versus the euro, dragged down by the continuing view that Japanese interest rates will stay ultra low for a long time and leaving the Japanese currency as a cheap source of borrowing.
The yen was also weighed by improving risk appetite thanks to abating concerns about troubles in the US subprime mortgage market -- which caters to borrowers with a poor credit history -- spilling over into slower economic growth and possible US interest rate cuts.
Concerns about the US economy were calmed on Thursday by healthy sales reports from US retail companies, helping the Dow stocks average post its biggest point gain in 5 years and enabling the dollar to recover from all-time lows against the euro and a 26-year trough versus sterling.
Fresh clues on how consumers in the world's biggest economy are bearing up will come from official retail sales data for June at 1230 GMT and the Reuters/University of Michigan July consumer confidence survey at 1400 GMT.
'It appears that markets have finally recovered from the scare related to the US housing market ... So with risk-seeking back in the financial markets, the yen has gone out of favour again,' said Tobias Thygesen, senior analyst at Danske Markets in Copenhagen.
'Given the recent worries over the US housing sector and perhaps possible knock on effect on the consumer, we may see some reaction if the (US retail sales) number surprises.'
By 0706 GMT, the dollar traded at 122.45 yen, barely changed on the day and pulling away from a one-month low of 120.96 yen struck earlier in the week.
The euro rose as high as 168.96 yen according to Reuters data -- an all-time high.
It edged down about 0.2 per cent to $1.3764, moving away from Thursday's record peak of $1.3799. But technical analysts said fresh peaks were likely soon, with $1.3850 seen as the next key level on the way to $1.4000.
Sterling eased to $2.0267 after striking a 26-year high of $2.0364 the previous session.
Japanese financial markets will be closed on Monday for a national holiday.
Traders said expectations of slow-paced rate tightening by the BOJ was keeping investors comfortable with selling the yen. Japanese rates are the lowest among the industrial nations at just 0.5 per cent.
'Market players are rebuilding yen carry trade positions,' said Mitsuru Sahara, a senior trader at Bank of Tokyo-Mitsubishi UFJ, referring to trades in which investors borrow low-yielding currencies to fund purchases of higher-yielding assets.
'A rise in share prices is encouraging them to buy higher-yielding currencies against the yen, as well.'
The Nikkei average rose 1.4 per cent and European stocks opened higher on Friday after the Dow Jones industrial average jumped more than 2 per cent to a record high on Wall Street the previous day.
Higher share prices boost investor confidence about taking on risky positions such as yen carry trades.
UBS said its risk index moved to 0.1 from 0.0, indicating an increase in investors' risk appetite.Reuters